What is mortgage refinancing?
A mortgage is a contract between the homeowner and a lender that lets you borrow funds to buy or refinance a house and gives the lender the right to seize your property if you are unable to repay the funds you’ve borrowed.
Refinancing a mortgage or a home means you are trading with your current mortgage for getting a newer one. The old one gets paid off by the newer one and you have left with the newer mortgage loan and one monthly installment.
So why you should do it? Well, people have a few reasons to do it, you can get cash from your home, refinance it to a lower interest rate which gives you a lower payment, cut your loan term, in case of divorce you want to remove the other person from the mortgage.
How Does Refinancing a mortgage work?
The refinancing approach is usually less complex than the house buying procedure, although it possesses multiple same steps. It can be difficult to say how much time your refinance process will take but usually, it takes 30 – 45 days.
here are six steps that you should follow:
Step 1: know why are refinancing
Step 2: Know the rates of different lenders
Step 3: Compare rates and fees
Step 4: Propose your Application
Step 5: Appraisal
Step 6: Underwriting
Step 7: Closing day
Step 1: Know Why you are Refinancing
The very fast step is to have a clear and concise plan, why you are refinancing and what benefits you will get from refinancing and does it align with your goal.
There are lot many reasons for house owners to take refinancing:
- Lowering monthly installments
- Get cash from your home equity
- Lower your 30 years mortgage loan down to 15 years
- Convert Adjustable-Rate Mortgage to a Fixed-Rate Mortgage and vice versa.
Step 2: Know the rates of different lenders
So, we are good to go now because now you have a clear goal and you have decided to go for mortgage refinancing. Now the next and important step is to get the rates from at least four or five lenders.
Lower Refinance rates and closing costs can immediately give you a few thousand bucks saving.
Step 3: Compare rates and fees
To be sure which lender is best for you and align with your refinancing goals you can take very much logical and informed decisions, which can save a lot for you.
For example, you will get Loan Estimates from your lenders, it is a three-page document that contains information about your interest rate, the total cost for refinancing, monthly installment, etc.
Now you know from which lender you want to refinance your mortgage.
Step 4: Propose your Application
Now go for the application filling and applying for the refinance, some important documents you need are
- 1099s and/or W2s for the past two years
- Tax Return of past two years
- Bank statements
- Paystubs
Additional documents may require depending upon your nature of work like if you are self-employed or retired and receiving pensions, please get the list of all required documents from your lender.
Step 5: Appraisal
This is the most important part of the refinancing process, the lender ordered a new appraisal for your property and does a detailed evaluation of your home value.
Step 6: Underwriting
The underwriter will check all the necessary documents and ensure that it meets all the necessary requirements.
Step 7: Closing day
This is the final step of your Refinancing process.
Closing day means you will be funded by your lender but before that, you have to go through the mandatory three-day waiting period where borrowers have the window to cancel the process and it is called Right of Rescission.