Although homeowners are not required to refinance the mortgages on their homes, many people choose to do so after a few years. Refinancing a mortgage can allow homeowners to eliminate private mortgage insurance, lower their interest rates, or make a plan to pay off the mortgage sooner than the original loan. Although the home purchase is already secure, people may discover that refinancing is a little like obtaining a mortgage. Here's the process homeowners will likely follow as they pursue refinancing, with some advice to make the experience a bit easier.
1. Evaluate Current Credit Usage and Overall Debt
Like buying a home, a borrowers' credit and debts are an important factor in a home mortgage refinance approval. In many cases, owning a home increases someone's credit score, but it also increases their debt. Homeowners should be cognizant of the other kinds of debts they have to put into their applications, and whether this can affect their refinance. Refinancing loans may offer applicants more options. As a general rule, people should try to keep their total debts (including housing) to less than 45 percent of their gross monthly income. Homeowners may want to look at these factors months ahead of time, so that they have time to make corrections to their credit reports or pay off debts.
2. Shop Around for Mortgage Lenders and Loan Options
Homeowners are not required to use their original lender or the current owner of their mortgage for a refinance. In fact, many people decide to go with a different lending institution. Shopping around for loans helps to ensure that applicants understand what options are available to them specifically, so they can choose the best terms. Homeowners will do best if they know precisely what they want from the refinance, such as:
- fixed-rate loans
- smaller payments
- lower interest rates
- shorter or longer payment plans
- cash to pay off other expenses or debts
The best options relate to the East Nashville homeowners' current financial needs and how long they plan to stay in the home. People should also compare the requirements of each loan. Some terms are dependent on the home's value, how much equity the homeowner has accrued, or the credit of the borrowers. Most loans to refinance have closing costs. People may be able to wrap those costs into the loan, but they should remember that many lenders offer this feature in exchange for a higher interest rate.
3. Prepare Paperwork and Apply for Loans
Refinancing a mortgage requires another trip through underwriting, and that demands very similar kinds of paperwork. Applicants should be prepared to prove the following:
- regular income with a current pay stub
- consistent employment
- current mortgage statement
- the last two years of W-2's and tax returns
- bank and investment account statements
- value of any assets
- explanation for any questionable credit issues
Having all this paperwork ready to go in advance could shorten the process. It may take a few weeks to collect all the information, so homeowners can save some hassle by starting relatively early.
4. Home Appraisal
For people who have owned a home for many years, the home appraisal may not make a huge difference in the nature of their refinance. Anyone who bought recently, or who lives in an area with slow-growing or volatile home values, may gain or lose loan options based on the appraised value of the property. A home appraisal usually determines the size, style, and general condition of the home. The appraiser assigns a number based on these factors and the sale prices of comparable homes in the area. Homeowners usually have to pay for the appraisal, but the report may be requested directly through the lender. This means that people may have little recourse if they disagree with the decision except to try a different lender.
5. Complete and Sign the New Mortgage Loan
At any point in the process, homeowners may ultimately decide that they would rather stick with the mortgage they have currently. Until they sign the final paperwork, they are not obligated to accept the loan. Borrowers should follow up with their original Loan Estimate to confirm that the details are consistent with their closing documents. They need to provide funds for any closing costs. Once they sign to close the loan, the new mortgage is used to pay off the old mortgage and the homeowner will have a different creditor to pay.
Refinancing a home is a way for homeowners to get better terms than they could secure in their original mortgages. Investing time into finding the right kind of loan can help people to get the best possible deal for the future. With these tips, homeowners will be prepared to go through a refinance from start to finish.
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