So, you have had your first mortgage. A totally new field full of pitfalls and unexpected twists for any novice. But once the anxiety is over and you start learning the ropes of this dynamic financial domain, you realize you could have done things differently and struck a better deal. Is it too late to change the loan conditions? No. You can refinance your mortgage.
Refinancing a Mortgage: Definition and Reasons
The term "mortgage refinancing" refers to replacing an existing mortgage loan with a new one. Why do borrowers decide to ditch the loan they currently have and go for a different bargain?
- High interest rates. People discover that their monthly payments and, thus, overall interest costs can be much lower after the mortgage interest rate plummets due to internal or external factors.
- A desire to change loan terms. A customer would like to switch from a 30-year deal to a 15-year one to repay the loan faster, or extend the term to lower obligations.
- Opting for a fixed rate instead of an ARM. An Adjustable-Rate Mortgage (ARM) is subject to potential payment increases, whereas a fixed rate is always stable.
- Eliminating FHA mortgage insurance. Federal Housing Administration (FHA) loans come with mandatory insurance, which increases the amount you pay. By switching to a conventional loan, you cut down on payments.
- Cashing out equity. If you refinance for more than you owe, you can spend the difference in cash to pay college tuition, pick up the tab for home improvement, etc.
- Changing the number of borrowers. You can add a borrower if someone agrees to share the financial burden with you, or remove one (say, after a divorce).
No matter what reason (or a combination of them) you might have, the mortgage refinancing procedure is essentially the same and will take you from 30 to 45 days.
A Step-By-Step Guide to Refinancing a Mortgage
Here is how you refinance your mortgage in 6 simple steps.
- Get to grips with the goal. You should understand why you are doing it. Is it a monthly payment reduction, shortening the term, switching to another rate, etc.?
- Check your credit score and equity. The higher the score, the more favorable the conditions you may be offered. For instance, to get a conventional mortgage without insurance, you should have a 620+ on your score and at least 20% equity (that is, the total value of the acquired property minus the sum you still owe).
- Select a lender. Sticking with the current one is not always the best policy (after all, you aren’t satisfied with the mortgage it has granted, are you?). Try to take three lenders (or more, if you have time and inspiration) and perform their out-and-out comparison regarding fees, rates, and terms. Opt for the most balanced combination of basic parameters.
- Prepare the papers. You should collect all financial documents (tax returns, bank/brokerage statements, pay stubs, etc.) and submit them to the lender. Make sure you lock in the interest rate to prevent it from rising before the red tape is over.
- Get ready for the home appraisal and underwriting. The process is identical to the one you went through when you were buying the property, and the lender determined its value. Unfortunately, the routine isn't free (it is going to cost you a couple of hundred dollars). Then, the financial documents you have submitted are verified.
- Close the deal. After you get approval and sign all the necessary papers, there's one more expenditure item: closing costs of several thousand dollars. The sum depends on the total loan amount (usually between 2% and 6% of it).
At first sight, it’s not rocket science. However, to be on the safe side, borrowers often seek professional assistance to let the process go like clockwork.
How LBC Mortgage Can Help You
We are a team of seasoned mortgage experts who offer a broad variety of financial products, such as conventional loans, bridge loans, landlord loans, commercial loans, vacation home mortgages, construction loans, portfolio loans, and more, to customers in 10 states and nationwide. During 18 years of presence in the financial market, we have accumulated a wealth of experience and knowledge to recommend the loan that will fit a borrower's requirements perfectly and provide qualified advice at every step of your journey to owning a home of your dream.
Contact us for a free consultation.
A Recap
If you are a mortgage holder dissatisfied with the terms, interest payment amount, adjustable rate, mortgage insurance, or any other loan condition, you can refinance your mortgage, that is, replace the existing one with a new deal. To do that, you should understand the end goal, ensure your credit score and equity make you eligible for better loan agreement provisions, find a reliable lender, prepare financial documents, lock in the interest rate, get a home appraisal, and close the deal.
