Refinancing your mortgage can give you some breathing room during this period of economic uncertainty by lowering your monthly payments and/or saving you money over time.
Californians are refinancing loans at a 35 percent higher rate than last year, in part because interest rates were reduced when the coronavirus pandemic hit, making borrowing more affordable.
You can save money or access equity by refinancing your mortgage. Set a refinance objective for your property, then evaluate rates and costs.
So, here’s everything you need to know regarding mortgage refinancing.
Table of Contents
First, What Exactly Is Mortgage Refinancing?
Refinancing is the process of replacing an existing mortgage loan with a new one.
The majority of customers refinance to lower their interest rate and cut their monthly payments, which can save them hundreds of dollars in interest.
However, it isn’t the only benefit of refinancing a mortgage.
You can also refinance into a new loan type or term, which may allow you to pay off your mortgage faster. You might also remortgage to get cash out of your home equity.
Reasons for Refinancing a Mortgage
Homeowners refinance their mortgage loans for a variety of reasons. Here are a few of the most important ones to consider:
Lower interest rate and payment
If your credit has improved or market rates have fallen since you took out your first loan, you may be able to save money on interest by switching to a lower interest rate and monthly payment.
Switch rate type
If you have an adjustable rate mortgage, switching to a fixed rate loan can help you avoid market fluctuations.
Reduce loan duration
If you reduce your loan term from, say, 30 years to 20 or 15 years, you can usually qualify for a reduced interest rate.
You can also save money on interest over the life of the loan by doing so. You may be able to reduce your monthly cost by extending your loan term.
If your house has a lot of equity, you might be able to cash out a portion of it with a refinance to pay debts, finance a big purchase, or buy out an ex-spouse in a divorce.
What I need to know regarding refinancing?
As mentioned above, refinancing is the process of replacing an existing mortgage loan with a new one.
You apply for a new home loan the same way you did when you bought the house when you refinance. Instead of purchasing a property, the money from the loan is used to pay off your current mortgage.
Your present mortgage obligation is basically erased when you refinance. It also allows you to choose your new mortgage’s interest rate and loan terms, allowing you to receive a new home loan that saves you money or helps you achieve other financial goals.
As a result, you’ll continue to pay down your mortgage, but you’ll be paying payments on the new loan rather than the old one.
It’s important to note that you don’t pay off the initial mortgage yourself. On the back end, the mortgage lender(s) in question handle that.
As far as you’re concerned, the mortgage refinance process is usually very similar to the one you went through when you got your first house loan.
The Ultimate Benefits of Mortgage Refinancing
Refinancing your mortgage has a lot of advantages. A new mortgage can have a shorter term, stabilizing your payment with a fixed interest rate.
Or allow you utilize the equity you’ve built up in your home, while the majority of them center on lowering your monthly payment.
The following are the most typical benefits for homeowners to refinance their homes:
Lower your payment by refinancing
If your current interest rate is greater than today’s rates, refinancing could save you money.
Refinancing a $250,000 mortgage to reduce the interest rate from 6% to 3% would save over $400 per month in interest and principal payments.
Converting to a fixed rate
Adjustable-rate mortgages (ARMs) are fantastic for the first 3 to 5 years, but the monthly payment can skyrocket beyond that.
When you refinance an ARM, you can get a fixed rate for 10, 15, or 30 years. This means you’ll always know what your monthly payment is, helping you to create a well-balanced household budget.
Lower your payment by removing PMI
If you buy a property with less than a 20% down payment, you’ll almost certainly have to pay private mortgage insurance (PMI) on top of your interest.
Mortgage refinancing Stockton CA once you’ve built up 20% equity might eliminate the PMI payment allowing you to save even more money each month.
Reduce the length of your mortgage
If you’re thinking about selling your house or want to get out from under monthly payments, reducing the length of your mortgage can help you get the most out of it.
Converting from a 30 year to a 15 year mortgage allows you to grow equity faster, giving you additional alternatives for your property.
Borrow money from your home equity
Are you thinking of upgrading your home, paying off high-interest credit cards, or taking a vacation?
Your house may be able to assist you in obtaining the funds you require to fulfill your objectives.
If your property has more than 20% equity, you can use a cash-out refinance to borrow against it to pay off debt, increase the value of your home, or take that once-in-a-lifetime trip.
Refinancing Your Mortgage: A Step-by-Step Guide
Refinancing a mortgage should not be taken lightly. You can define your goals and take the required actions toward lowering your payment or pulling cash out to reach your financial goals after assessing the advantages and cons.
1. Set a defined financial objective
If you’re refinancing, you should have a compelling purpose for doing so, whether it’s to lower your monthly payment, shorten the term of your loan, or access equity for home improvements or debt reduction.
Every circumstance is different. Everyone has their own set of priorities.
2. Examine your credit report and history
You’ll need to meet the same qualifications for a refinance as you did for your original home loan.
The better your credit score, the better refinance rates lenders will offer you – and the more likely your loan will be approved by underwriters.
3. Determine how much equity you have in your home
Your home equity is the difference between the overall worth of your home and the amount you owe on your mortgage. Check your mortgage statement to discover what your current balance is.
Then, use internet house search sites or hire a real estate professional to conduct an analysis to determine your home’s current assessed value.
The difference between the two is your home equity. For example, if your property is worth $325,000 but you still owe $250,000 on it, your home equity is $75,000.
4. Look into a variety of mortgage lenders
Obtaining quotes from at least three different mortgage lenders can save you hundreds of dollars.
When you’ve decided on a lender, talk about the optimum time to lock in your rate so you don’t have to worry about rates rising before your loan closes.
5. Organize your paperwork
Obtain current pay stubs, federal tax returns, bank statements, and any other documents that your mortgage lender may require.
Your credit and net worth will be scrutinized by your lender, so be transparent about your assets and liabilities.
6. Prepare for the evaluation
A mortgage refinance appraisal is usually required by mortgage lenders to determine the current market worth of your home.
7. Bring cash to the closing if necessary
The closing disclosure, as well as the loan estimate, will detail the amount of money you’ll have to pay out of pocket to complete the mortgage.
8. Keep a close eye on your debt
To stay current on your mortgage, keep copies of your closing documents in a safe place and set up automated payments. If you sign up for autopay, certain banks will give you a reduced rate.
Lastly, how do you know if you are eligible for a refinance loan?
The requirements for refinancing a mortgage are similar to those for obtaining a new mortgage. Lenders will take into account a number of factors, including your:
- Credit history and score
- Payment history on your current loan
- Current home value
- Income and employment history
- Home equity
- Other loan obligations
If you meet a lender’s requirements based on these criteria, you’ll be given an offer based on the risk you pose.
If you have a good credit history, a steady income, and a lot of equity in your house, you might be able to receive a new loan with better conditions.
If, on the other hand, your credit score has dropped since your first mortgage or you have more overall debt, you may have a more difficult time getting accepted for better conditions.
There are numerous options for refinancing a home, and millions of homeowners in California may be eligible for cheaper rates and payments.
The easiest strategy to discover a low rate is to compare offers from three to four different lenders.