6 Steps to Take When Refinancing Your Home

Generally, if you are paying a percent or more over the current mortgage interest rate then refinancing your home could be financially beneficial. Deciding whether to refinance your home often comes down to whether it will actually save you money or not. If you have 20 years left to pay your old loan, and you sign a new 30 year loan, would your payments be lower if you paid the new loan off in 20 years? If the answer is yes, follow these six steps to refinancing your home.

Refinancing Your Home Loan? Do These 6 Things First

Check your credit score

Your credit score plays a large factor into whether you will qualify for the amount needed to refinance your mortgage and what your new interest rate will be. It could be the difference of paying a 5 percent interest rate or a 4 percent rate. Get copies of your credit report and make sure there are no errors on the report. Even if you think your credit is fine, double check so you can correct any unexpected errors before you start the process of refinancing your home loan. If you find an error it could take weeks to correct, so it’s helpful to find the errors early so you aren’t set back in your preferred refinancing timeline.

Research your home’s value

Just because you bought your home for $300,000, doesn’t mean it would sell today for more, or even for the same price. Since we’re in a seller’s market, based on the location and quality of the home, you may see that your home is worth significantly more today, even if you just bought within the past few years. Check homes in your neighborhood/zip code to see what they are selling for to get a good idea of what buyer’s are willing to pay for a similar location. Even though you aren’t selling your house, the lender will still require an appraisal to determine how much the house is worth when refinancing your home loan.

Gather documents

If you haven’t applied for a mortgage in a while, you may be surprised at how much documentation is involved. Just like applying for a mortgage when you first bought the home, you will need to provide proof of income, employment and assets. Your lender will likely request multiple pay stubs from your place of work, request a letter from your boss stating you are still employed, and any documents verifying your ownership of assets. All of this is in addition to bank statements and tax returns. The faster you get your documents into the lender, the faster the refinancing process will go.

Research multiple mortgage lenders

When lenders compete, you win! The lender you used for your first mortgage may not represent the best option for refinancing your home. Another broker may have better options for you that your original lender did not have the means to provide. You can do your research online, but you are going to get the most accurate quotes when you provide your exact credit score and loan to value ratio. Personal referrals are a great way to find high quality mortgage brokers.

Consider whether you want a longer or shorter mortgage term

When refinancing your home, you start the 30 year cycle (or 15 year cycle, etc.) all over again. If you don’t want to do that, and if you qualify, consider a 10-year, 15-year, or 20-year term. You can also simply pay more than your minimum amount each month to speed up payoff of your home loan. Nearly always, the faster you repay your mortgage, the less interest expense you will have. If you are seeking to pay off your mortgage before retirement, shortening your mortgage or paying it off more quickly can be an ideal option.

Understand closing costs when refinancing your home

The fees from your bank or mortgage lender may not be the only costs associated with closing. You will probably also have to pay title search and title insurance costs, application fee, appraisal fee, loan processing fee, any points you want to buy, and closing agent fees. In some cases, these fees can be rolled into your newly refinanced loan, or a lender may offer credits against some of these closing fees in order to win your business.

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