How to refinance your mortgage now
After rising steadily earlier this year, mortgage rates fell in April, ending the month at 2.98%. Homeowners who have yet to refinance their home loans now have the option of locking in a lower rate.
People are already enjoying the plunge. Refinance loan applications rose 9% for the week ending April 16, according to the Mortgage Bankers Association.
If you want to refinance your home loan, start the process as soon as possible. Refinancing loans took 52 days to close in March, according to ICE Mortgage Technologies. This is the same amount of time as in February, but 17 days longer than in March of last year.
No one knows for sure how long these lower rates will last, and experts still predict that rates will rise throughout the year.
Follow these steps to get the ball rolling.
1. Set a refinancing goal.
Most homeowners refinance in order to get a lower interest rate and therefore lower their monthly payments. However, this is not the only reason to refinance.
Different types of loans offer different benefits.
You may want to switch from an adjustable rate mortgage to a fixed rate mortgage to secure an ever lower rate. You may want to go from a 30-year loan to a 15-year loan to pay off your mortgage faster. If you have enough equity, you may also be able to save on mortgage insurance by switching from an FHA loan to a regular mortgage.
Perhaps you’ve recently had to deal with large medical bills, unscheduled home repairs, or other expenses that are weighing you down financially. If you’ve built up enough equity in your home, paying off cash will not only refinance your loan, but also draw out additional cash.
Knowing what you want to accomplish with a refi will help you determine the type of mortgage product you need. Consider all of the options to see which one works best for you.
2. Check the equity in your home.
According to Discover Home Loans, you could qualify for a conventional refi loan with as little as 5% of your home equity. However, most lenders prefer that you have at least 20% equity.
If you have more home equity, you may qualify for a lower interest rate and lower fees, as lenders will view borrowers with higher equity as lower loan risk. Greater equity also means that you are less likely to end up owing more than the home’s value if home prices go down.
To get an estimate of your home’s equity, subtract your current mortgage balance from your home’s current market value. The result will be the equity in your home. Contact a knowledgeable local real estate agent to get an idea of your home’s value. Zillow’s house price estimate can also be a good rough starting point.
You should also prepare your home for a formal appraisal, which will be part of the refinance application process. Have documentation on your home improvements handy. (For example, did you add a bathroom or replace an old roof?) It won’t hurt to clean and organize your home for refurbishment.
3. Check your credit.
Before making a loan decision, it is important to check your credit score, as well as your credit report.
Your credit score will largely determine the favorable rate offered by a lender. The higher your score, the lower the rate you will qualify for and the lower your monthly payments will be. If your score is low, look for ways to improve your credit score well before you apply for a loan.
Your credit report shows the information on which your score is based. This is where you can check for any errors that could negatively affect your credit score. If you find any errors in your report, you can contact the credit bureaus to have these items removed. Be prepared to provide documentation proving the error.
As part of the consumer protection measures put in place by the CARES Act, you can get a free weekly credit report from any of the major reporting bureaus until April 2022 (as a rule, you are entitled to one free report from each credit reporting company per year.)
You should also be aware of the factors that can temporarily affect your credit score. Applying for credit cards, personal loans, or auto loans just before, at the same time, or right after a refi request will lower your score, albeit temporarily.
4. Do the math to see if the refinancing will pay off.
Before you apply for a refi, make sure you understand the costs associated with a new loan. The closing costs for refinancing are generally between 2% and 5% of the total loan amount. For a refi to make sense, you have to be able to recoup those closing costs and save money in the long run.
To determine if it’s worth it, you’ll need to calculate your breakeven point. This refers to the time it will take for the savings on the new loan to exceed its cost. You can calculate the breakeven point by dividing the loan closing costs by the amount you save each month.
For example, if your closing costs are $ 5,000 and your monthly savings are $ 100, your breakeven point would be 50 months or about four years. In this case, refinancing probably makes sense if you plan to live in your home for more than four years.
An easy way to determine if a refi is right for you is to use a mortgage refinance calculator.
5. Put your papers in order.
Even with the recent advancements in the online application process, you will still need a lot of documentation to prove that you are ready to refinance.
The documents you should have on hand include your last pay stubs, the last two years of W-2, information on your current home loan, as well as information on property taxes and home insurance.
If you are self-employed or have a non-traditional job, have two years of bank statements available. You may also need a profit and loss account from your bank, the last two years of 1099 forms and customer invoices as proof of income.
A lender may have additional documentation requirements depending on their initial assessment of your finances. Once you’ve chosen a lender, find out about the other requirements so you can get them together in advance. This will make the application process much smoother.
6. Shop around for a mortgage lender.
Don’t just take the first interest rate offered to you. You should compare the rates and terms of at least three different lenders to see which one offers the best package for your needs.
You should also consider different types of lenders. Compare rates from major banks as well as online lenders and local credit unions. If you have a long-standing relationship with a financial institution that also offers home refinancing, check with them as well. You may be able to negotiate a better rate if you already have other financial transactions with the lender – but not always. Don’t assume that the lender you know is giving you the best deal.
7. Block your rate
Once you’ve found a lender who offers the best terms and rate for you, set your interest rate.
Although still very low, mortgage rates have been on the rise since the start of the year. A rate lock-in will ideally ensure that your interest rate does not rise until the close.
However, rate locks are generally made for periods of 15 to 60 days. With lenders taking some time to close these days, you may want to go for a longer lock. While some lenders may not charge a rate lock, others will. The rate foreclosure fees can vary between 0.25% and 0.50% of the total loan amount. If your loan does not close on time, extending the foreclosure period may result in additional charges.
The key with a rate lock is timing. Check with your lender to find out how long it typically takes to close, then lock in the rate during that time.
A note on mortgage forbearance.
If you’re struggling to make your mortgage payments due to the COVID-19 pandemic, seeing if you qualify for a loan refinance may be a good first step.
Refinancing your loan could get your mortgage payments within your budget. However, if refinancing isn’t an option because you don’t have enough income or your credit score has been affected, consider asking your lender for forbearance.
Extended under the CARES Act, forbearance allows homeowners to suspend mortgage payments for an initial period of six months. If conditions do not improve within this period, up to two six-month extensions can be requested. The deadline for requesting an abstention has been extended several times, with the latest extension ending on June 30.
Suspended payments don’t show up on your credit report as overdue payments, and withholding doesn’t negatively affect your credit score, but the fact that you requested a break in your payments does show up on your credit report. Potential lenders can see this information and it can affect your desire as a borrower.
More from Money:
The pros and cons of switching lenders when refinancing your mortgage
The average homeowner could earn $ 4,000 a year by refinancing. Here’s the smartest thing you can do with the savings
6 ways refinancing your mortgage could cost you money
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