Refinancing is basically a re-mortgage. That means rebooting the mortgage process from the beginning. Let’s say you have a fixed rate mortgage that amortizes on a 30-year period with a 4.1 percent interest rate. Five years after you took out your mortgage, market conditions caused interest rate to plummet down to 3.4 percent for the same 30-year FRM. In this case, it makes all the sense to refinance.
Aside from taking advantage of a lower interest rate, there are various other reasons why homeowners choose to refinance. These include:
– shifting from fixed rate to adjustable rate, or vice-versa – strategic when future interest rate patterns are determined
– changing the amortization term, either to pay off the loan faster or spread it out to lower monthly payments
– removing or adding a name to renew the ownership legalities of the property
– tapping into the home’s equity to take it out as cash
However good the market conditions, however, refinancing is still not for everyone. Refinancing is all about timing and there are various considerations that you also have to factor in before you decide to renew your mortgage. The most common reasons why you should rethink refinancing may be:
– You are too deep into your mortgage payments. Experts say if you have paid over 10 to 15 years of your payment, it may not be wise to refinance.
– Closing costs are expensive. Typically, they cost around 3 to 6 percent of your outstanding loan balance and pose the most roadblock among homeowners who consider refinancing.
– Your home does not have enough equity. In this case, your application is most likely going to be turned down.
– Paying your mortgage back to square one means you will have to repay the whole mortgage affair longer.
When you decide to get a refinancing, consider both sides of the coin and make sure you have properly evaluated your financial situation against the risk of carrying the debt to its full term. And, if you ever decide to give it a go, follow the right steps to successful refinancing:
- Prepare necessary documents. One of the most common reasons for delay in refinance closing is delay in documents. Make sure you have your papers ready, filled out, verified for authenticity and accuracy, and forward them to your lender at the soonest possible time.
- Find the loan that’s right for you. You don’t have to do business with the same lender who financed your first mortgage. You can inquire from various lenders and ask for an estimate of their interest offers. Pro tip: consider other financing alternatives such as credit unions if you want to save on interest.
- Forward your loan application.
- Have your property appraised. An appraisal determines the market value of your home. The mortgage refinance process will not move on until this value is determined. Therefore, it is important that you cooperate with your appraiser.
- Go through underwriting. The underwriter will evaluate your documents and decide if you are qualified to refinance. Other documents might be required upon request so be ready to deliver.
- Go over conditions and review loan approval. The letter of approval contains conditions that you must meet before closing. Review and read the fine print.
- Lock in right. Locking in protects you from future rate hikes. You are not required to lock in upfront but a fee is charged as you suspend your decision. The longer you lock, the bigger that amount. Typical lock-in period is between a week to 60 days. The lock in cost can be compounded in closing.
- Order your loan documents. Ask your lender for clarifying details of the closing cost to make sure there will not be any problem on the closing date. Then, schedule your signing date.
- Signing and closing. Additional identification records might be further required at this stage. You are given 3 days to cancel. Upon expiry of this period, you will then receive an HUD-1 form containing the official closing statement. Keep personal copies of said documents.