The Complete Refinancing Guide

Reasons to Refinance a Home Loan

By refinancing your current mortgage, you may be able to lower your monthly payments with a better interest rate. Even though we have started to see interest rates rise, they are still considered low. You could also shorten the term of your mortgage. Refinancing can also allow you to take cash out using the equity in your home to use for things such as home improvements or debt consolidation.

If you’re currently in an FHA mortgage it may be a good idea to reach out to your Loan Officer to see if you have 20% equity in your property. You may qualify for a refinance into a Conventional loan for removing the mortgage insurance from your monthly payment.

Follow these simple steps if you’re considering refinancing:

1. Consider why you’re refinancing. Are you looking to consolidate debt, complete long-awaited home improvements, or save for future investments?

2. Contact your Loan Officer to talk about your refinance goals.

3. Complete a loan application to have your credit and income reviewed so you can pre-qualify for new mortgage terms.

Should this include reasons listed about lower your monthly payment, shorten your mortgage term, lower your interest rate and include getting cash out?

Do Some Refinance Math

Refinancing is the process of repaying an existing loan on your property by taking out a new one. There are several reasons and benefits of refinancing.

If you are lowering your interest rate and monthly payment but have to finance in closing costs, it’s important that you calculate the breakeven point so you know the amount of time it could take to recoup the new costs financed into the new loan.

If your main goal is to lower your monthly payment, you can extend your loan term to reduce your payment. But if you’re looking to payoff your mortgage sooner and lower interest over the life of the loan, it could be to your advantage to look into a shorter-term loan. For example, if you took out a 30-year fixed-rate loan 3 years ago and have 27 years left at the time of the refinance, taking out a new 25-year mortgage will save 2 years of payments and pay off your home 2 years faster.

You might want to pay off your debt sooner than planned, even if it means making a larger payment. Your 30-year fixed-rate mortgage can then be refinanced into a 15- or 20-year fixed-rate mortgage. Shorter-term mortgages often offer lower interest rates. As a result, you not only pay off the debt sooner, but you also save interest over the life of the loan.

You can refinance to get cash out if you have enough equity in your home. If you have sufficient equity in your home above 20%, that equity can be taken out as cash. Say your home has a market value of $250,000 and your mortgage balance is $100,000. You could refinance your home for $200,000 and receive $50,000 in cash at closing. With a loan amount of $200,000 and a value of $250,000, you have 80% equity remaining.

Lock Your Interest Rate

Another key item for your refinance is your rate lock. Interest rates may change based on market trends, so if you're happy with the current offered rate, lock it in or risk having it increase.

When applying for a refinance, ask your Loan Officer if locking your interest rate is free or if there is a cost. Ask about the length of time for the lock. Most lenders will enable you to do so for 30 to 90 days.

However, there are certain drawbacks to locking in your interest rate. If the rates decrease, you aren’t taking advantage of the lower rate. Furthermore, depending on your lender, locking in your interest rate beyond a 45-day period could be expensive. It’s important to consult your Loan Officer to determine if locking in your interest rate is a smart choice for your current situation.

Preparing For Your Appraisal

When refinancing, it is important to prepare your home for an evaluation. When you apply for a refinance, your home will undergo an appraisal to determine the market value of your home. Here are some quick strategies that can boost the value:

· Find improvement projects that can boost the value of your home. Minor upgrades such as fresh paint, new windows, an outdoor patio, and new ceiling lights. Replacing anything worn or damaged such as flooring or kitchen countertops and cabinets are a good fairly cost-effective solution to ensure you give the best first impression to the appraiser.

· Curb appeal will create good first impressions, which is why the appearance of your home's exterior is crucial. Planting flowers, mowing the lawn and painting the front door will spruce up the outside of your property. All these upgrades are low-cost yet can increase your property value.

· Keep track of your upgrades, keeping all receipts, and take before and after pictures. Before the appraisal begins, present them with a list of home improvements to explain how you enhanced your home.

· Adding a wow factor inside your property will also make a good impression on your appraiser. Polish the floors, clean the bedrooms and bathrooms and clear clutter from common areas. Taking time to spruce up your home can improve your chances of a successful appraisal.

Closing Costs

Your new loan may appear to be a great deal, but have you considered all the costs and fees that come with a new home loan? When applying for a refinance, it's critical to factor in closing fees, as they can quickly add up.

Here are some closing costs to keep in mind:

• Appraisal fee

• Title insurance and title search expenses

• Discount points

• Closing expenses typically range between 2% and 3% of the loan amount.

Takeaways

Consider whether it’s beneficial to refinance.

Always talk to a Loan Officer to discuss your goals and options, whether it's to cut your interest rate, get a lower payment, or payoff your mortgage sooner.

Consider locking in your interest rate to avoid costly interest rate changes.

Anticipate closing fees and making sure your Loan Officer discloses fees to evaluate your breakeven point.

Finally, expect and prepare for your appraisal to help boost your home’s market value.

Ready to refinance or have more questions?

Call 858-336-5200 with any questions you may have about this blog or our loan programs.