Guide to Refinancing
Refinancing your mortgage loan can come with serious financial benefits when timed properly. Not only can it lower your monthly payment, but it could also shorten the life of your loan, eliminate your PMI costs or even put cash in your pockets to use on renovations, credit card balances or just a fun family vacation.
Why Refinance Your Loan?
There are many reasons you might consider refinancing, but the main reason for most would be to lower the interest rate – and subsequently the monthly payment.
Interest rates are always in flux, so at some point they’ll likely drop below your loan’s current rate, meaning you’ll be paying more than you should. When this happens, a refinance can help lower the amount of interest you pay on a monthly basis and over the life of your loan.
Refinancing can also shorten your loan term (from 30 years to 10 or 15, for example) or eliminate private mortgage insurance, if you’re still paying it on your loan. You can also choose to do a cash-out refinance and use your home equity as a line of credit.
If you have an adjustable rate mortgage, a refinance can also help to lower your monthly costs once rates start to fluctuate to secure a more consistent, predictable payment for the rest of your loan term.
When is the Right Time to Refinance?
It depends on your goals. If you’re looking to lower your monthly payment, then you’ll want to wait until interest rates have fallen below your current rate – and lock in at that lower rate as soon as possible. If you intend to cancel your PMI or secure a cash-out refinance, then you should wait until you have significant equity in your home to pull from.
If you have an Adjustable Rate Mortgage and your rates have started to increase after the initial lock-in period, this might be a good time to consider refinancing. You may consider a new ARM loan or a fixed rate one, which will provide more consistency.
To determine whether or not refinancing is worth the effort, you should take into account all the costs and fees associated with the process. Like your original mortgage, a refinance will come with certain closing costs, not to mention you’ll need to pay off your first loan. Ask your loan officer for an estimate of the refinancing closing costs and compare those to the savings you stand to gain monthly and over time. Does refinancing still make sense? If so, it’s time to pull the trigger.
What the Refinance Loan Process Looks Like
The refinance process is very similar to your initial loan application. You’ll work with a lender and loan officer to determine the right product for your goals, and you’ll submit an application, including various financial documents and forms to verify your income, employment, assets and other details.
As with the initial purchase, you’ll also attend a closing as the final step of the process. You’ll sign your official loan documents, pay your closing costs and finalize the refinance process.
Gathering up your paperwork and documentation early on can help the process move faster and more efficiently, so if refinancing is on your radar, start gathering up your tax returns, W-2s and bank statements now. The quicker you can provide this documentation to your loan officer, the better – especially if you’re hoping to lock in the week’s current interest rates.