As your home value rises or interest rates drop, it may seem like the ideal time to refinance your home loan. But many homeowners struggle with the next or even first steps towards refinancing. Simply learning about the process is the most important element when determining if a home refinance is right for you. Consider these important aspects of refinancing a mortgage and talk to a Fremont Bank Loan Officer to get started. We offer no closing cost refinance options, and our loan officers are available to help you through every step of the refinancing process.
What is Home Refinancing?
Refinancing a home loan involves replacing your existing mortgage with a new one. Just like when you first bought your home, mortgage refinancing requires you to qualify for the new loan and meet the lender’s requirements. Applicants will go through the underwriting and closing processes for their new loan, just as they did when they originally bought their home.
Why Should You Refinance?
A good time to consider refinancing your loan can be when your home value increases or when mortgage rates decrease. Refinancing can also help lower your monthly payments, reduce your total payment amount, consolidate debt, or get cash out to put the equity in your home to use.
Before you begin, it’s best to clarify the reason you want to refinance your home loan and your ultimate goal for refinancing your mortgage. This goal will guide you throughout the process of determining if refinancing is right for you, and which refinancing option to choose.
The most popular reasons homeowners choose to refinance include:
Tapping into their home’s equity.
- A cash out refinance is when you borrow more than you owe on your current loan, and the lender gives you back the difference. This gives the borrower cash on hand for things like home improvements, renovations, or an emergency or rainy day fund. Borrowers may get a lower interest rate at the same time as a cash out refinance, so be sure to discuss interest rates with your loan officer.
- Reducing monthly mortgage payments.
When you refinance a loan, you may be able to get a lower interest rate, which in turn, should lower your monthly payments. You can also reduce your monthly payment by extending the loan term, from 15 years to 30 years, for example. However, just as reducing your loan term can help you save on interest over time, extending your loan term can mean paying more interest over time. - Paying off a loan sooner.
Homeowners who have a 30-year mortgage may want to consolidate to a 15-year mortgage to pay off their loan in half the time. Paying off a loan over a shorter time period means that homeowners will pay less interest over the life of the loan. Keep in mind that this could cause your monthly payments to increase. - Switching to a fixed rate mortgage from an adjustable rate mortgage.
Adjustable rate mortgages have interest rates that can change over time, while fixed rate mortgages always remain the same. Borrowers who prefer financial stability and consistency in monthly payments can consider switching to a fixed rate mortgage. - Canceling FHA mortgage insurance payments.
Homeowners who put down less than 10% of the home’s sale cost at closing may be required to pay FHA mortgage insurance. The only way to remove FHA mortgage insurance payments is by refinancing the current mortgage into a non-FHA loan. In order to qualify for a non-FHA loan, borrowers must have accumulated enough equity, which can be calculated by subtracting your mortgage balance from your home’s value.
How to Refinance a Mortgage
Now that you can determine your goals for refinancing, understanding the process will help you move faster and get the best loan possible.
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Determine your home equity.
Home equity is your home’s current market value minus the amount you still owe your mortgage lender. To calculate your home equity, simply check your mortgage statement for your current balance. Then, to determine your home’s value, review real estate websites to get an idea of what other similar homes are currently selling for in your area. A real estate agent or appraiser can also run an analysis to figure out your home’s estimated value. The more equity you have in your home, the better. Most refinance loans will have better rates and fewer fees if you have more than 20% equity. However, you may be able to refinance with as little as 5% equity. -
Compare lenders.
Borrowers can save thousands of dollars by comparing quotes from multiple lenders. Interest rates aren’t the only important factor. Pay attention to fees and the fee schedule of your new mortgage to decide which lender is offering you the best option. Once you’ve chosen a lender, discuss a timeline for locking in your interest rate, as interest rates can change daily. - Confirm refinancing is the best option.
Now that you know your home equity and have quotes from lenders, remember that you can still choose to keep your current mortgage. If you find that refinancing is no longer the best choice, you can always consider it at a future time. Consider the cost to refinance, monthly savings, and how long it will take for you to recoup these costs. An online refinance calculator can be a helpful tool at this step of the process. - Collect relevant information and documentation.
If you decide to move forward with refinancing, there will be a lot of important documentation to provide to the lender. Just as with your original mortgage, collecting this paperwork will take time. At minimum, keep the following on hand throughout the refinancing process, and remember that your lender may ask for additional information:
Proof of employment/income
Tax returns (last two years)
List of assets
Copy of your current mortgage loan
Debt statements - Review the Loan Estimate before moving forward.
Getting approved for a refinance is exciting, but it’s not quite time to celebrate yet. Before you sign on the dotted line, double-check your loan amount and terms, repayment terms, and all fees. The Closing Disclosure is an important document to review carefully, as it includes all of the final numbers for your home loan. Keep a close eye on projected monthly payments, closing costs, and if your new loan includes a prepayment penalty. Ask for any necessary changes before signing off on the new loan.
Fremont Bank offers no closing cost refinance options and an outstanding team of Loan Officers who are available to help with whatever you need, from locking to signing. Give us a call at (877) 528-1514 to request a free, no-obligation consultation and review your refinancing options.
