If you own a home, there's a good chance you'll do a mortgage refinance at some point. Few borrowers stay with their original home loan for a full 30 years; most either refinance or sell the property long before the full term runs its course.
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How Refinance Loans are Unique
A mortgage refinance is a new loan that pays off and replaces an old mortgage loan. Since mortgage loans are not typically amended, a refinance mortgage is the easiest means of restructuring mortgage debt. There are several reasons why you might do this: to lower the interest rate or payments, to shorten or lengthen the loan maturity, or to increase or reduce the loan amount.
How does refinancing work?
The application process for a mortgage refinance is very similar to what you experienced when you purchased your home.
- You consult with a mortgage loan officer,
- Complete a home loan application,
- Supply the required documentation to verify your income and assets and an appraisal will be completed on your home.
You'll have to pay closing costs, but they should be lower than they were when you purchased the home. When the refinance mortgage funds, the new lender automatically pays off the old mortgage lender, including any prepayment penalties, and transfers any remaining funds to you. The old lender releases its claim on the home, and the refinance lender files a new one.
How do I know if I should refinance?
Many homeowners start thinking about refinancing when there's some part of the existing mortgage loan that's no longer appealing. Examples include:
- Your payment is too high.
- Your interest rate is higher than what's available on the market.
- Your adjustable interest rate is too volatile.
- You want to pay off your mortgage in 15 years instead of 30.
- You want to cash out your home equity.
Common Questions About Refinance Loans
Can I reduce my payment with a mortgage refinance?
You can reduce your payment with a mortgage refinance by lowering the interest rate and/or by extending the maturity date.
What is a cash-out refinance?
If you have home equity, you may have the option of refinancing for more than what you owe on your old mortgage. This is a cash-out refinance, in which the amount leftover after the pay-off is transferred to you, and can be used as you wish. Your payment will reflect a higher loan balance, but you could possibly offset some (or all) of the increase with a lower interest rate or extended maturity date.
When is the right time to refinance?
A mortgage loan officer can help you run the numbers, but the decision usually depends on how market mortgage refinance rates compare to what you're currently paying. If you can find a refinance mortgage that will save you money and help you achieve your financial goals, then the time is right.
The 7 Types of Documents You Need for a Refinance Loan
Get these documents together before you start the refinance process to streamline your loan.
With so many people filing for refinance these days, it can take a lot longer than you'd expect to have your refinance go through. You don't have control over how backed up your lender is with applications. However, you can speed things up on your end by gathering all of the appropriate documents before starting the refinance process.
Think back to your original mortgage and all of the documents that you had to gather. For a refinance, the documentation for your refinance is pretty much the same. The overall purpose is to prove different aspects of your finances to your lender.
All lenders have slightly different requirements, but you can bet that they'll probably ask for documents in the following seven categories:
- Proof of Income - Proving your income generally requires the following documents:
- The last 30 days of pay stubs
- Your current tax returns
- Tax forms like W-2's and 1099s
- Insurance - You'll probably need to produce documentation for two kinds of insurance:
Homeowners insurance, to verify that you have enough current coverage for your home. Who are you currently insured with?
Title insurance. We will order this on your behalf to confirm the taxes, the names on the title, and the legal description of the property.
- Credit Information - You'll need to sign an authorization for a credit report.
- Monthly Debt Load - While your lender will be able to see your debts during a credit check, you will still have to account for those debts. That means pulling together documents for things like:
- Your current mortgage
- Home equity loans
- Credit cards
- Auto loans
- Student loans
- Total assets: You need to document all of your financial assets other than your home. This means documenting things like:
- Savings accounts
- Mutual funds
- Retirement accounts like 401Ks
- Other real estate
- Appraisal: Your lender will order a current appraisal of the house.
- Loan to Value: The lender will usually also ask for some kind of estimated value of how much your house is worth compared to what you owe on the existing loan.
Once you've got all of this information together, it should be smooth sailing, right? In a perfect world, yes. Expect plenty of delays regardless of how well organized things are on your end. Not that this is a reason not to do a refinance-but knowing what to expect can make the process seem a little less frustrating.