With interest rates as low as they are these days, it makes a lot of sense for homeowners to look into refinancing now. With a little bit of paperwork, and sometimes some money for closing, you can lock in a low rate for the remainder of your mortgage. It may be able to save you thousands of dollars, or even tens of thousands of dollars, in addition to potentially lowering your monthly payment and moving your payoff date closer. As you dig into the process of refinancing, you should understand how it works and what you’ll need to do.
Determining Whether to Refinance
If you got your loan more than a few years ago, you probably have an interest rate that’s higher than today’s market rates. Because the interest often adds up to more than what you borrowed in the first place, locking in the lowest possible rate should be one of your top priorities. Beyond that, consider whether you’re going to keep this loan for long enough to recoup the costs. In most cases, it’s not worth it to refinance if you’re only lowering your interest rate by half a percent or if you’re planning to sell your home within the next two to five years.
Getting Qualified with a Lender
Once you’ve made the decision to refinance your mortgage, it is time to get connected with the best lender for your needs. Lenders will look at several criteria, including your income, other debt obligations, savings, and credit score. Shop around and get interest rate quotes from several lenders to help identify the one that will work best for you. In addition to considering interest rates, pay attention to the closing costs, which are the fees you’ll have to pay the lender for the process of refinancing.
How to Handle Closing Costs
You can choose from three main ways to pay the closing costs associated with refinancing. The simplest option is to pay them at closing with your own funds. If you don’t have money available, that doesn’t necessarily mean you can’t refinance, though. Some lenders will let you add the closing costs to your loan balance, so you’re effectively borrowing money to cover closing. Other lenders can give you a slightly higher interest rate and use the cash rebate associated with that rate, called a yield spread premium, to pay for some or all of the closing costs.
Completing the Paperwork
When you have a lender and a plan for what kind of mortgage you are getting, all that’s left to do is to finish the paperwork. The lender will need all the details for your current loan, including the amount outstanding and who your current lender is. You’ll also need to provide your tax returns, W-2 forms, and pay stubs. Lenders also may need income verification and an appraisal or inspection on your home to determine its value. Be sure to stay in touch with your loan processor to ensure you submit all documents and get your brand new loan.
Author Bio: Bryan Grayson writes about finance, refinancing, mortgages, and more.