The time is ticking on super-low interest rates.
Following a long period of historically low rates, consumers are now faced with increasing rates that make it less affordable to take on major purchases, such as buying a house.
If you’re already a homeowner, you might still have time to replace your current mortgage rate with something far more favorable. Through a refinance, you can change the dynamics of your financing to save money each month. A refinance is also an opportunity to put home equity to work for you.
Others will use this opportunity to eliminate their monthly mortgage insurance bill.
Whatever your refinance goals are, here are the steps you can expect during this process that can save you money.
Like any other type of financing, applicants will want to make sure their credit is in a good place.
Major credit card companies and the major credit bureaus offer customers free monthly or annual snapshots of their credit health. Take advantage of these free resources to understand where you are credit wise. Your credit standing will impact the terms of your loan.
Evaluate types of loans
Based on your need, you’ll select a lending program that makes sense for your unique situation.
For example, if you currently hold an adjustable-rate mortgage, switching to a fixed rate loan could be a top priority.
This type of loan switch is the most common among individuals who refinance their mortgages because it has an immediate effect. You can avoid a higher-interest repayment period, potentially saving tens of thousands of dollars, maybe more, over the life of the loan through a fixed rate.
It’s possible you have 20 years left on the original 30-year loan arrangement. Switching to a 15-year loan accomplishes two major things. It can reduce the interest you pay each month and shorten the repayment period by years.
And since you’ll be repaying the loan more quickly, you will also save on interest costs.
If you decide for a conventional loan, then your primary goal is to save money on interest and possibly on the monthly bills. As an alternative, you can do a cash-out refinance, which lets you borrow money by using your home’s equity. The money you pull from the loan can be used in a variety of ways. It can pay for a major home renovation or for an advanced degree.
As you prep to take the next steps in the loan application, you should also be ready to present the lender with the necessary documents.
As you would expect, you will be asked for pay stubs, W-2 forms, tax returns, bank statements, a copy of homeowner’s policy and other relevant documents.
Now that you’ve researched the type of loans and gathered your paperwork, it’s time to apply.
Keep in mind that any lender can process your refinance application. So, you don’t have to go to your original lender that you worked with to buy your home.
In a matter of days, you’ll learn more about the next steps and review the loan estimate. This standardized form outlines information about the interest rate, loan amount, type of financing and the interest over the life of the loan.
Like buying a home, you will also need to appraise the property to make sure its value aligns with the lender requirements.
The lender will facilitate this process and therefore you cannot shop around or negotiate the fee for the appraisal. You do have the right, however, to dispute the findings of the appraisal if you think it doesn’t accurately reflect the home’s value.
Start underwriting process
Now that you’re happy with the terms of the loan and the appraisal checks out, the nitty gritty of loan underwriting begins.
During this step, the underwriting team will review your application and make sure that everything is in place to move forward. It’s possible that the team will reach out to ask for additional verification on documents.
Lock in rate
Once the underwriting process is complete, it’ll be time to lock in your rate. At this juncture, you will have certainty about how much your monthly payment will be.
It also offers peace of mind that your rate will not change so long as you close the loan within the specified timeline.
If you’re happy with the loan estimate, you will proceed and review and sign the closing disclosure within three days before the loan is set to close. This gives formal notice that you agree with the terms of the mortgage refinance and choose to move forward.
Close on the loan
Be ready to review final documents and provide signatures. Take your time, as there will be a lot to review. It’s important that you feel comfortable and have a grasp of the terms set before you.
Once you sign the final paperwork, you have successfully completed a home refinance.
During a refinance, homeowners are legally protected through the right of rescission.
Per the Truth in Lending Act, borrowers can cancel some home loans within three days without penalty if they choose.
The right of rescission applies to home equity, refinance, some reverse mortgages and home equity lines of credit loans. It does not apply to purchase loans.