Refinancing your mortgage means getting a new home loan to replace your current one. Depending on your particular situation, refinancing could potentially lower your monthly payments or provide other financial benefits.
Here's a guide to figure out whether refinancing may be a good option for you, and how the process works.
Who Should Refinance?
Before you worry about how to refinance, you need to decide if refinancing is the best option for you. Refinancing your mortgage costs money (fees, points, and other closing costs). Therefore, you need to weigh the benefits against the associated costs to see if it's financially worthwhile.
Refinancing may be a good move for you if:
- You plan to stay in your home for a long period of time (more than a few years).
- Your current interest rate is significantly higher than the current market rates.
- Your monthly payment is too high to comfortably afford.
- You want to use some of your home equity (cash-out refinance).
- You have sufficient equity in your home and want to get rid of Private Mortgage Insurance (PMI).
- You want to extend or reduce the amount of time you're paying off your mortgage.
How to Refinance
The process of refinancing isn't very different than that of obtaining a mortgage to purchase a home. The application process is similar, as are the documentation requirements.
Shop around for a lender: Most lenders that originate purchase mortgages also offer refinancing products. Note that the fees and rates can vary significantly between lenders, so it pays to shop around for the best deal. Even a small difference in interest rates can make a big difference over the long run (we're talking about a loan that you'll have for 15 or 30 years, after all). Plus, finding lower fees means you'll have to come up with less cash on closing day.
Make sure your finances are in good shape: When evaluating your refinancing application, there are a few main things a lender will look at, including (but not limited to) the following:
- Your credit
- How much equity you have in your home
- Income and employment
Choose the terms you want: You have a few choices to make when deciding on a refinancing loan. The best choices for you depends on what you hope to achieve through refinancing.
- Length of the loan -- You can stretch your payments over 30 years, or take advantage of the low 15-year rates and pay off your mortgage faster.
- Points or lower rate -- The lender may offer you a lower interest rate in exchange for paying "points," or a percentage of the loan amount up-front.
Close the loan: Once you've chosen a lender, applied for the loan, and been approved, you'll set a date to close on the loan. Unlike when you're buying a house, there is no walk-through to do, nor any keys to exchange, so the closing should simply be a matter of signing some paperwork.