If you are considering refinancing your home mortgage now is the time to prepare. There are important steps you should take to prepare and determine if refinancing is a good option for you.
Here are a few essential steps to take before you sign on the dotted line.
1. Understand if Refinancing will Benefit You
Refinancing is a big move, so it is important to understand exactly what this process will do for you. You are replacing your existing loan with a new one. The new loan will pay off your first loan and give you a new interest rate, monthly payment and a new term.
Most people refinance to lower their interest rate. You lower your cost of borrowing and as a result you save money. Refinancing can also help you change your loan term from a 30 year to a 15-year loan term, or 15 year to a 30-year team. It may also allow you to consolidate your first and second mortgages into one loan.
2. Check your Credit Score
Your credit score(s) determine whether or not you will qualify for refinancing and what type of interest rate you will get. Usually, the higher the credit scores the lower your rate will be. Do you have bad credit? Bad credit can affect your ability to secure loans and a good interest rate. If your credit needs attention, this is the time to take the steps to fix it.
3. Check your Home Equity
Your home equity is the difference between the current market value of your home and the amount of money you still owe on your mortgage. This information will play a part in determining if you can refinance.
Lenders usually want you to have at least 20% equity in order to refinance. Lenders typically will only finance 80% of the value of the home in a refinance.
4. Shop Rates
You probably look at prices when you purchase groceries, clothing and other goods. Shop for the best interest rate and terms when looking to refinance your home.
You may not find a lot of difference in rates due to recent laws in the banking industry but it always makes good sense to research all of your options on rates and term lengths.
5. Cost of Closing
There are other costs associated with a loan. Some of the more common major cost and fees are; Loan Origination Fees, Application Fees, Appraisal Fees, Points, Lender Home Inspection Fees, and Private Mortgage insurance. The fees can vary from lender to lender, so it is a very good idea to understand what your closing costs may be and to make sure that the refinancing savings outweighs the cost.
6. Gather Important Documents
You may be surprised at the scrutiny lenders apply to potential borrowers. Some of the information you will need is documentation about your current loan, income tax returns, savings and investment information. You also will need to prove employment and current income.
Once you have all of your information gathered and are ready to make your final decision, remember to act quickly to lock in your rates and terms while they are still available.