According to Black Knight, an estimated 472,000 homeowners in the US are able to refinance their mortgages by at least 0.75%. Doing so would enable these homeowners to save around $309 a month on their mortgage payments, accumulating to approximately $3,708 in savings annually.
Aside from saving money, there are a number of reasons as to why homeowners should consider refinancing their mortgages. For instance, if a homeowner is coming to the end of a fixed-rate period on an adjustable-rate mortgage, then refinancing into a fixed-rate loan would allow them to lock in a rate that will not then change periodically.
This article will break down the steps that you will need to follow in order to refinance your mortgage.
1. Set a refinancing goal
The majority of homeowners that choose to refinance their mortgage do so in order to benefit from a lower interest rate, which would in turn reduce their monthly payments.
Of course, it is important to note that different loans will offer different advantages. For instance, switching from an adjustable-rate mortgage to a fixed-rate mortgage will guarantee a permanently lower rate.
It is thus worth evaluating what you want to gain from a refinance. This will help you to determine the type of alternative mortgage you need.
2. Check your home equity
It may be the case that you are able to qualify for a conventional refinanced mortgage loan with as little as 5% equity in your home. However, in the majority of cases, most lenders will prefer borrowers who have at least 20% equity in their home.
The more home equity that you may have, the more likely it is that you will be able to qualify for a lower interest rate. This is because lenders will view borrowers who have higher equity as less of a lending risk
To seek an estimate of your home equity, you will need to subtract your mortgage loan balance from your home’s current market value – this can be sought after from a reliable local real estate agent. The result of this will be your home equity.
3. Check both your credit score and credit report
Credit scores can majorly determine the rate that a lender will offer a prospective borrower. As such, before refinancing your mortgage, it is always important to check both your credit score and credit report.
It typically goes that the higher your credit score, the lower the rate and consequently the lower your monthly payments will be. If you have a low credit score, it is worth looking at ways you can follow before attempting to refinance your mortgage.
It is certainly worth checking your credit score and cross-examining your credit report too. If you find any mistakes, you can contact and flag these to the credit bureaus so that they can be removed. Always make sure you have the relevant documentation to prove these errors.
Further, as part of the CARES Act, you can receive a free weekly credit report from any of the major reporting credit bureaus until the end of the year.
4. Make sure you work out whether refinancing is worth it
There can be a number of additional costs and fees associated with a new mortgage loan. Typically, mortgage refinance costs run between 2% to 5% of the total loan amount. You should ensure that you will be able to recover these closing costs to make the refinance worth it.
It is worth referring to a free online mortgage refinance calculator to check whether it will be worth it overall.
5. Make sure that your mortgage paperwork is in order
In order to refinance your mortgage or remortgage, you will need to provide plenty of documentation. This includes recent bank statements, information about your current home loan, as well as property tax and home insurance information.
Some mortgage lenders may also require further documentation. It is worth checking out their requirements prior to application to make the overall process a lot smoother.
6. Lock in your fixed rate
Once you have shopped around for the best deal that suits you, you must lock in the interest rate. This interest rate lock will guarantee that your interest rate will not increase before the final payments have been concluded.
Some lenders may even charge for a rate lock, with rate lock fees ranging between 0.25% to 0.5% of the total mortgage loan amount.