Should you refinance?
Not all homeowners need to refinance their mortgage, but if your situation calls for it, whether it's a budget change or you need cash for a down payment on a second home, make sure you're taking the proper precautions.
Once you know you're setting yourself up for success, what do you need? The first step is to know how much your house is worth. Depending on how much your house appreciates in value, you can get closer to your preferred interest rate than you imagined.
It isn't difficult to evaluate your home's worth, and once you have the appraisal, you can compare it to the value your house was worth when you first bought it and determine whether refinancing is your best option. After this evaluation, you make your choice and begin your deep dive into refinancing, keeping your needs in mind.
Interested in your home's current market value? Receive a free online home value estimate!
What do I need to refinance my home?
When you're an adult, the stacks of paperwork are endless, so let's go over the proper documentation that you need to remember to refinance your home. You'll need to gather: your tax returns, your proof of income, basic credit reports, and any statements of any assets or debt.
Application
Generally speaking, most refinancing options have applications. This might be what you fill out at the bank or in the comfort of your own home. This application will be where you document all your basic housing information and how you will refinance it. Whether it be a new 30-year mortgage or a change to a 15-year plan, this application will be part of your life's climax, so fill it out with your lender or financial advisor.
Before you fill it out, though, you should be sure to calculate price estimates as an example of what your monthly plans could look like. The whole point of refinancing is to save more money monthly or take some of what's already yours and repurposing it. Be careful here, and wait out the excitement until you've fully prepared for it, just in case you change your mind.
Tax returns
Between your W2's and 1099's, it doesn't matter which ones you file with, as long as you have the last two years of your tax returns.
Without your returns, you won't be able to qualify for any loan with the bank or lender, so make sure you have them prepared and they are filed correctly.
As long as your lender and bank get a good look at your completed returns, there should be no problems, meaning no reason for the IRS to poke in its head.
Bank statements
Your bank should already have these documents, however, if you are refinancing with a new bank or lender, you need to be sure they have all of these statements. The bank should have access to any previous statements; this is to check for fraud and other suspicious activity.
Along with these should be your mortgage statements and any other income documentation. The best way to get the most beneficial statement for your refinancing is to present all documents reasonably.
Homeowner's insurance
Your homeowner's insurance is just one more of the routine things that your lender will need to look at to ensure that your home has the right coverage. If you don't have homeowner's insurance then this won't apply to you, unless your city or state has rules requiring them.
As long as all the documentation you have is valid, there should be no problem with this step in the application.
Credit score
Whenever you work with a bank to finance anything, they always check how good you are at being in debt, aka your credit score. You don't need a credit score at all to refinance, but if you have one, it should at least match the average score.
The minimum requirement for good credit is 720. Anything higher than that is great credit, and you should have no problems getting a great rate when you refinance.
If your score is lower, you may need a cosigner depending on your lender's or bank's needs. Otherwise, your rates will be boosted and you'd be better off not refinancing at all.
Your interest rates would be in the 6% to 7% range, and that's a long way from where you want them. Regardless of your scores, if you have them, you need to show all your credit reports when applying.
Changing your mortgage plan
Usually, you sign up for a 30-year mortgage plan, so there should be no problem with refinancing to another 30-year plan, right? Not necessarily.
You can actually lose way more money when you refinance back to another 30-year plan than if you adjusted your plan based on how many years you've already paid. For example, you've paid five years off your 30-year mortgage, so instead of losing almost $100,000 with another 30 years, refinance it to a 25-year mortgage.
Now that you've reworked that, depending on your interest, you've saved a few hundred dollars a month. However, in certain cases, you have more wiggle room with a 30-year plan, so look into more details with your bank or lender.
Interest rates
A huge proportion of your mortgage payment will be going towards your interest rate, unless you can afford to pay off the full amount upfront. Unlikely, right? So keep chugging, as your interest rates will differ between banks and how much your house is worth, and of course the housing market.
When the market is slow, the rate of interest will be low and you'll be able to refinance with between 3% to 4% interest rates, saving you way more in the long run. This is another tricky spot, though. You never really have a full gauge of how much your interest will grow against you when you buy anything.
Since the market is constantly fluctuating, you need to watch out for interest that's due to change. That's why you have to estimate your future costs with your lender to ensure you are both on the same page.
Your lender
When you start refinancing, your lender will be taking you through every step, informing you of your costs and decisions throughout the process. They will be using the same information stated earlier to pay off the original mortgage price and loaning you the funds for your new one.
Before picking a lender, be sure to check market prices and the overall costs of additional fees, like your principal and interest difference. Then they'll want to see your tax returns and your homeowner's insurance policy.
Be sure to have all your documents in order to save time, because you might be working with your lender for a few weeks to finance everything properly. This time is crucial to be able to make the right assessment for refinancing your mortgage.
Do your research
Well, you've already made part of the effort here, so good job, but it's always essential to read over your specific city's restrictions on refinancing your mortgage. Each state has different laws, and sometimes certain cities too, so read up on yours.
If you have any questions, ask your lender. They should know the answers. If not, be concerned. Piggy-backing off this, always get written documentation of any agreements, and before signing, thoroughly read all of the fine print. Small details like the closing costs and initial deposits are vital to keep in check. Any miscommunication on these could cost you an arm and a leg, so make sure you check them.
Lastly, you need to calculate all your final and monthly costs. If you don't have what these rates are written down somewhere, you could lose track and pay more than you agreed to pay.
Verifying that you have dotted all your I's and crossed all your T's will keep you in the know of all home refinance options, and if you do it at all, you should do it right the first time.
Closing costs
As you close on your loan, you'll notice the closing costs of your home's finances, and it might be cause for concern if you aren't prepared for them.
When you are on the last leg of refinancing, be sure to calculate your closing cost into the rest of your totals so you aren't surprised. Your lender might tell you, but be sure to know everything you can.
Usually, closing costs range from 2% to 5% of the total cost of the purchase. For example, the total cost of your home could be $200,000, but the closing cost would be an extra $6,000 with a 3% closing cost.
You should try to account for any APR and extra interest rate that might boost the closing costs, which is what you should research. However, there are more fees than just your interest rates that factor into the closing costs.
Additional fees
Some of the fees you might see in the closing costs are inspection fees, the appraisal fee, recording fee, survey fee, title fee, and title insurance fee. These pay your lender's overall supplementary costs and fees.
Expect to pay the 2% to 5% fees for closing costs upfront, but be sure to ask a financial advisor or your lender about the estimate on your total closing costs.
When should you refinance?
When it comes to the housing market, it's crucial that you check how much money you'll save in the long run.
When you refinance, your goal is to save more money by the end of your term, so there's no need to waste your money during busy times.
Try to refinance when the market is slow. Currently, the global pandemic has knocked refinance rates lower than they have ever been.
If you're looking to refinance in the future, then you'll need to watch the market for dips and take stock of the nation's current situation to make the right financial decision. Now you also have to keep in mind other factors too. Currently, there is a pandemic, but the vaccine is becoming more available to everyone.
Take advantage of the situation while you can, but be wiser than to hop on while the market starts its rise again. It's a game of chance right now, so stay on your toes. The market could spike as soon as more people notice start going back outside and moving out to new places. Keep your eyes peeled.
Get started
Refinancing your home and mortgage plan can be a turning point in managing your financial records or for moving your future forward.
Hopefully, this guide has helped walk you through the basics you need to know, so your research and application process will be easier. Feel free to bookmark this page for future reference to use when you start refinancing.
There are plenty of resources out there to notify you about all the ins and out of being a homeowner, along with the best refinancing options for your new mortgage.