Refinancing a mortgage means you pay off the current or existing mortgage and replace it with a new one. In this post, we will break down the cost of refinancing and where to get started.
Refinancing has its costs. Did you know that in order to refinance, you may have to pay between 3% to 6% of the loan’s principal? It is important to understand where you will get these funds. Additionally, if you are able to finance, it can take several years to recoup that cost based on the savings you can potentially get from the shorter loan term or lower interest rate.
Once you understand why you are refinancing, the next steps are to determine your credit score and know your home’s current value. Monitoring your credit score should be done regularly. This can not only affect refinancing your home, but other things such as buying cars, obtaining personal loans or credit cards. Understanding your home’s current value will also help you decide if refinancing your home is worth the cost.
Next, you’ll be checking for the best mortgage rate. As we discussed last week, many people refinance from ARMs to fixed-rate mortgages. The goal is to lower your interest rate or shorten the loan term. It is important to shop around to find the best option for you. Talk to your lender about your financial goals (and why you’re refinancing in the first place) to make sure you are able to achieve that through refinancing.
After you’ve determined the best mortgage rate, you can calculate the actual cost of refinancing, and if that works for you. This is also the fun part of the process…gathering all the paperwork! A loan refinance means lots of fees, similar to when you closed your home when you purchased it. These include application fees, title research and insurance, tax transfer fees, an underwriting fee, and the list goes on. Be aware of these as you approach the finish line. The paperwork you need includes pay stubs (many employers provide these online – you may need to request this which could take a few days), bank statements, etc. Your lender will provide a list of documents.
The final steps of refinancing are to lock in the mortgage rate with your lender and have the money on hand for the closing. Yes, you will have a closing to refinance your home. A loan estimate will be sent to you a few days prior to closing, so there shouldn’t be any surprises. When you’ve “closed” on the home, your refinance is complete.
Refinancing is no piece of cake. As we’ve said several times, the most important takeaway is to understand why you want to refinance. It’s no quick fix to financial problems, and it won’t benefit you if you plan to sell in the short-term. Do your research, be smart about your goals, and talk to a lender about the best options for you.