Top 10 Checklist to Refinancing Your Mortgage

Homeowners often use refinancing to replace their existing home loan with a new one. In the process, they get the advantage of a lower monthly payout, a lower interest rate, or even a loan against home equity. Even though refinancing brings a few advantages to homeowners, it is always best to consider all factors with due diligence before applying for a home refinance loan. You would need to reassess your existing mortgage and also evaluate your personal financial conditions.  

Today, mortgage refinance rates are pretty low, providing homeowners with a range of options to choose from. As a homeowner, you may save considerably by refinancing your mortgage. Continue reading as we take you through the checklist of top factors to consider while refinancing a mortgage. 

What is Refinancing?

Refinancing a mortgage involves replacing your current home loan with another loan at new rates, terms, and payment conditions. In most cases, refinancing helps homeowners save on their monthly payments.

Steps to Refinancing Your Mortgage

1. Evaluate Your Current Mortgage

This is the first thing to do when you are considering refinancing a mortgage. You will need to review your existing loan. Things to consider are:

• The current interest rate.

• Your monthly payout each month.

• The term of the loan.

• Prepayment penalties.

• The duration for which you have paid the current loan.

• The total payments over the loan’s life.

 

Armed with these details, you will be in a better position to fairly compare the details of the new loan so that you can make the right decision. 

 

2. Assess Your Home’s Equity

When refinancing your home loan, you must determine the home’s current market value. Employ professionals for a home appraisal. This is a crucial step because your home equity, which is defined as the amount equal to the difference between the home's market value and the due mortgage balance, can impact the refinancing deal. If the equity is higher, there is a chance of getting a loan at better terms and rates and vice versa. In such cases, you can eliminate PMI or private mortgage insurance, saving you extra money and helping optimize your financial benefits.

 

3. Consider Your Financial Goals

Refinancing a mortgage can be a smart decision only when it is aligned with your financial goals. Only then can it deliver benefits. 

 

• Lower Interest Rates: First, consider the potential savings with lower interest rates. You must calculate the amount of money you will be able to save every month throughout the life of the loan at the reduced interest rate. Even a slight decrease can add up to significant savings in the long term.

• Cash-Out Refinance: Earlier, we spoke about home equity. If your home has considerable equity, consider a cash-out refinance option. You can use the equity to cover major expenses like home improvement costs, education costs, or debt consolidation. With cash-out refinance, you can conveniently convert the home’s equity into cash for large expenditures. 

• Change Loan Terms: Refinancing a mortgage also means a change in the loan terms. This can significantly impact your finances and offer numerous advantages. This can be aligned with your financial goals. For example, if the loan term is shortened, it means you can pay off the mortgage faster. This can be a great option if your financial situation has improved since you took the existing loan. However, if the loan term is shortened, the monthly payments can be higher, which means a higher financial onus. On the other hand, an extended term means the term is significantly higher with lower monthly payments. If your income has decreased since you took the current home loan, you may find the option of extended term financially more viable, allowing you extra cash flow. 

 

Carefully consider your current financial conditions, goals, and plans before you decide to extend or shorten the loan term. It is a good idea to consult with a financial advisor to help you make the right decision. 

 

• Consolidate Loans: Refinancing is a practical option for those who have multiple loans like home loans, personal loans, and credit card balances. With refinancing or debt consolidation, these loans can be consolidated into a single mortgage, which can help save money and make financial matters easy to handle. Loan consolidation is an effective way of combining multiple payments into one single payment - it saves you from managing and juggling multiple payments each month. This way, not only will managing your finances become simpler, but you can also achieve a better credit score by making regular payments. 

 

One of the most significant benefits of consolidation of loans is the advantage of lower interest rates overall. Refinancing is an excellent option for loan consolidation if your current debts have higher interest rates. Look for reduced mortgage refinance rates. It can help free up funds and lead to substantial savings. The other outright benefit is the increased cash flow from lowered monthly payments. This gives you financial relief when managing your home budget. 

 

4. Understand the Costs

Next, you need to relook at the costs, especially closing costs, that the lender or the bank will charge you when you close the existing loan. You should know these costs upfront and indulge in an extensive break-even analysis. It will need to understand the time you will take to recover these costs and how you will do so.  

 

Remember, if the amount is considerably high, it will take you a couple of years to repay the money you pay as closing costs. Consider the bigger perspective - for example, if you are planning a career change or shifting from this home - to optimize your decision. Sometimes, assessing these aspects helps you decide if this is the right time to get a home refinance loan or not. If the recouping period is less and you have no plans to shift from your current home for the next few years, the refinancing can be a good decision.

 

5. Explore Loan Options

Now, this is the time to explore the options and assess if things are aligned with your personal and financial goals. You can choose between fixed-rate mortgages and Adjustable-Rate Mortgage. Here’s a synopsis of a few selected options to help you choose with ease. 

 

Fixed-Rate Mortgages

In this type of mortgage, the interest rate remains stable across the loan’s term. The common variations are 15-year, 20-year, and 30-year options. Some options also come with cash-out options against the home’s equity. Here’s a rundown of the same - 

• 30-Year Fixed Rate: This is best for people who plan to stay in the same home for a longer duration. The rate remains stable for 30 years. If you have a credible credit score and your home equity is sufficient, you can get this loan while avoiding PMI. The benefit is lower monthly payments, and the con is that you pay the interest over a longer time.

• 20-Year Fixed Rate: This is similar to a 30-year fixed rate option. The interest payment is for a shorter time. Compared to the 30-year fixed rate option, the interest rate is better, and the loan gets off sooner. However, the con side is that the monthly payments are a bit on the higher side.

• 15-Year Fixed Rate: In this case, the term period is the shortest of the three options. The interest rate is also the best. However, since the period is shorter, the monthly payments are much higher.

 

Adjustable-Rate Mortgages (ARMs)

This loan option is characterized by a low initial start rate. The low rate exists for a period, and once the period expires, the interest rate is readjusted, and it could be higher than the initial rate. This means that with ARMs, the monthly payment can increase with time. Some of the common choices are - 

 

• 5/1 ARMs: In this case, the fixed interest rate applies for the first 5 years. The annual adjustments start after 5 years. It helps save money in the short term.

• 7/1 ARMs: In this case, the interest rate is fixed for the initial seven years and adjusts after seven years. If you plan to stay in the house for a moderate period, this is a good option. 

• 10/1 ARMs: The rate is fixed for the initial 10 years, and yearly adjustments follow. This is a good option for borrowers who want to take advantage of long-term predictability.

 

Remember, in this loan type, the initial rates are low and attractive; therefore, the initial payments are pretty low. However, it can start to increase after the given period. If you plan to leave the home in a few years, this option can be a good option. Also, if there is a chance of your income getting hiked in a few years, this is a good option.

 

Government Programs

When considering a home refinance loan, you should consider a few government programs. The advantages are enough—in most cases, the qualifications are less stringent, and the features are borrower-friendly. 

• FHA: The Federal Housing Administration offers numerous loans at fixed rates. There are also programs that are curated to meet the specific needs of the borrower. The refinancing terms are less strict. However, the loan might require mortgage insurance if the equity in your home is less than 20%. For people with conventional mortgages, this is the best option for refinancing.

• VA: The US Department of Veteran Affairs offers this loan specially curated for veterans, their spouses, active military members, and even retired veterans. Some of the pros are zero down payment and competitive interest rates. PMI is not compulsory, either. Refinancing is more accessible with VA loans.

• AHARP: The Affordable Homeownership Assistance Program is for people from low and moderate-income groups. The programs are designed in a way that there is financial assistance, be it closing costs, down payments, etc. The interest rates are also reduced in most cases to make homeowners more financially secure, offering equitable opportunities for homeownership to people from the economically weaker section.

 

6. Prepare Your Documentation

• Credit Report: Applying for refinancing requires a review of your credit report. Ensure that it is up-to-date and accurate. Check your credit report from all three credit bureaus—TransUnion, Experian, and Equifax. Look out for inaccuracies because they can negatively affect your credit score. An accurate credit report improves your chance of getting faster approval and increases your chances of getting a loan at better mortgage refinance rates.

• Income Verification: Banks and lenders will ask for proof of income to be certain that you have the ability to repay the money. Make sure to collate your recent pay stubs, as well as other relevant documents like tax returns for 2 years, bank statements, employment verification letters, and so on. Ensure that the documents are up-to-date and comprehensive because these documents are proof of your financial health and stability.

• Debt Information: It is a good idea to create a detailed list of all your current and outstanding debts and the corresponding terms, like a debt profile. For example, if you have student loans, car loans, credit cards, and other liabilities, the list should include the names of the creditors, interest rates, monthly payment amounts, and outstanding balances. This debt profile gives insights into your debt-to-income ratio—a crucial factor that helps impact your loan eligibility, portraying a clearer picture of your financial obligations. 

 

7. Shop Around

• Compare Lenders: It is now time to get quotes from multiple lenders. This will help you compare the mortgage refinance rates and terms from different lenders. Feel free to shop around. You can keep shopping until you feel confident of having access to the most competitive rates and services. Ensure that all terms are transparently communicated and there are no last-minute surprises or hidden costs.

• Understand Mortgage Refinance Fees: Refinancing your mortgage means there are different kinds of fees, including application fees, appraisal fees, closing costs, title insurance, and so on. Once you are aware of these expenses, the calculation of the actual cost of refinancing can be easy. You must be sure that there are no hidden costs in the mortgage refinance fees. 

 

8. Work with a Mortgage Professional

• Licensed Loan Officers: Choose experienced professionals who can guide you through the process. The landscape of a home refinance loan is complex, and there are multiple aspects that you need to take care of. That’s why working with an experienced and licensed loan officer is imperative to help you make the best decision. 

• Ask Questions: Ensure they are available, transparent, and have your best interests in mind. You should feel comfortable with the loan officer. The officer should be there to offer sound advice and guidance to master this landscape. They should have answers to your questions and queries and be comfortable answering all your questions.

 

9. Closing the Refinance

Now, you are closer to closing the refinance. Make sure that the following steps are followed - 

• Sign Documents: You need to carefully review all loan documents before signing them. Documents include the loan agreement, the closing disclosure, and other paperwork. Ask questions and clarify your doubts regarding each document.

• Provide Funds: Arrange for the necessary funds to cover the closing costs. This can be between 2% and 5% of the amount given as a loan. You can pay this with a certified check or even wire transfer it to the closing agent.

• Set Up Escrow: If the refinancing amount requires an escrow account, you may need to establish one. The escrow account can be used for insurance and taxes. It can also provide peace of mind and help you manage your obligations more easily.

 

10. Post-Closing Management

• Annual Mortgage Review: It is essential to assess and reassess your mortgage regularly to ensure that it is aligned with your financial goals. This way, you stay on track and can tweak or make adjustments if your financial condition changes.

• Stay Informed: It is imperative to stay connected and in touch with your loan officer. They will keep you updated on the recent market trends. You should be up-to-date with fluctuations in interest rates. Follow news from the housing market developments. This will promote proactive decisions. At all times, stay on top of the mortgage trends so that you never miss out on optimizing your financial strategies.

 

Conclusion

To summarize, refinancing a mortgage is a strategic move and can help homeowners in reducing interest rates and monthly payments. You can also use your home equity for cash out and increase cash flow. It would help if you started by evaluating your financial goals. Then, assess your credit score, speak to different lenders, and compare the loan options. Ensure your necessary paperwork is in place, and see the savings you can make. Also, take into consideration the costs involved and carry out a break-even analysis to be one hundred percent sure that refinancing is the best option. 

Want expert guidance on a home refinance loan? Contact Total Mortgage. Our expert team will help you through the whole process and assist you in finding the right refinancing option that is aligned with your financial goals. The team will be there round the clock to get you started on achieving your goals confidently.