When the financial stars align, homeowners can reap the benefits of refinancing. Lowering monthly payments, saving money on the life of a mortgage, and even putting a little cash aside for upgrades are real possibilities. If you have been waiting for the right moment to strategically refinance your house, the following can help you make an informed decision.
Understanding the Basics of Mortgage Refinancing
Local lenders have a variety of mortgage refinancing programs that allow homeowners to take advantage of lower interest rates and more favorable repayment terms. It’s not unusual for singles, couples, and families to purchase a first home by meeting the minimum salary, debt-to-income ratio and credit score thresholds. After earning a higher salary and building up your credit history, it may be prudent to circle back and refinance.
What is Mortgage Refinancing?
Borrowers can take advantage of the equity they built, an improved FICO score, and secure a lower interest rate. Mortgage refinancing is essentially qualifying for a new loan that pays off an existing one.
Types of Refinancing Options
Homeowners have a variety of mortgage options to consider. Some loan products are straightforward. You simply swap out an old loan for a new one. Others provide additional refinancing benefits. These are types of refinancing loans worth considering.
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Cash Out Refinance: This option allows property owners to take out a lump sum based on home equity after the existing mortgage is paid off.
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Rate-and-Term: These refinancing programs adopt a similar mortgage with lower interest rates and more favorable terms.
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No-Closing Cost: Homeowners use these options to take advantage of low interest rates. Although it bundles rates and fees into the principal, the benefits of refinancing in this fashion can save money over the life of a loan.
Before attempting to reap the benefits of refinancing, it’s crucial to conduct thorough due diligence.
Evaluating Your Current Mortgage Situation
Although homeowners are keenly aware of their highest monthly expense — the mortgage — few take the time to truly evaluate their financial situation. Before making any mortgage changes, assess your current and potential future mortgage circumstances.
When Should You Consider Refinancing?
The best time to make a change is when you can tap into the benefits of refinancing. The first opportunity to refinance and save money can be something of a blessing. These are examples of when you should at least consider refinancing.
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Interest rates have dropped.
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Your credit score has significantly improved.
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You can pay down the principal.
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Tapping home equity helps achieve other goals.
In some cases, switching from an adjustable mortgage to a fixed-rate product is advantageous. This move stabilizes monthly expenses and eliminates the risk of interest rates spiking.
Calculating Potential Savings
One of the best ways to assess potential savings is by using a mortgage calculator. These free online resources allow you to input current mortgage costs and check them against the benefits of refinancing. If the numbers look promising, start getting organized to refinance your home.
How to Qualify for the Best Refinance Rates
Putting your best foot forward when applying for a new mortgage is essential. Before jumping into the process, take a moment and consider how to better your chances of securing the lowest interest rate possible.
Improving Your Credit Score
Start by getting a free copy of your credit history from the three major reporting bureaus — Experian, Equifax, and TransUnion. You can file a request at Annual Credit Report, call (877) 322-8228, or mail the downloadable form to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
The information enclosed serves as a guide to improving your score, sometimes in 30 days. Have errors corrected and pay off delinquent debts, among other positive efforts
Other Factors Affecting Eligibility
Loan officers assess eligibility factors such as debt-to-income ratio being no higher than 45 percent. Gather proof of income documents, such as pay stubs and tax returns, and provide bank account information to show you have a reserve fund.
Step-by-Step Guide to the Refinancing Process
Refinancing can seem fraught with challenges for people outside the loan processing profession. It proves a lot more manageable if you take the following steps one at a time.
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Establish your short- and long-term financial goals.
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Check your credit history.
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Take measures to improve your FICO score.
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Calculate your debt-to-income ratio.
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Decide on the type of mortgage.
It’s also prudent to consider which lender best meets your individual needs. In the mortgage refinancing industry, there are big differences.
Choosing the Right Lender
The right lender is typically the one offering the lowest interest rates, and favorable terms, and doesn’t slip in excessive or hidden fees. Corporate banks are under pressure to generate large profits to pay shareholders. By contrast, credit unions are usually not-for-profit institutions that make enough to cover expenses, and a small profit they re-invest in a local lending pool.
Necessary Documentation
You’ll need to show proof of identity with a Social Security number and a valid driver’s license or passport. Documents such as tax returns, pay stubs, income verification, and bank accounts are musts. Check with your local lender regarding any additional required items.
Potential Pitfalls and How to Avoid Them
It’s unfortunate, but not every lender employs ethical practices. In a buyer-beware world, homeowners need to read the proverbial fine print. Take your time to consider any mortgage application before signing it.
Refinancing Costs
Big corporations tend to load applications down with expensive fees after dangling what appears to be a low rate. Add up these sometimes unnecessary fees and high closing costs and ensure your financial interests are being served.
Timing Your Refinance
Timing your refinance to mesh with declining interest rates, higher equity, or an improved credit score can save thousands of dollars. Take the time to get organized now, consider getting pre-qualified, and move forward when the timing is right.
CCCU Can Help You Refinance Your Mortgage
When it comes to choosing the best mortgage refinancing option to fit your needs and lifestyle, it’s best to work with a lending professional like one of our Mortgage Specialists. Our mortgage team will listen to your needs and goals, and offer refinancing solutions that can help you achieve your financial goals.
If you still have questions about the benefits of refinancing, download our free checklist "Refinancing Your Mortgage: A Comprehensive Guide to Help Leverage Your Home's Value"
