When interest rates fall, the first thing on your mind might be refinancing your mortgage. For good reason too – since refinancing can save you tens of thousands of dollars over the life of your loan.
Refinancing is when you use a new loan, typically with a different interest rate and term, to pay off your old mortgage. This means you transition from paying the money back on one mortgage to another. Refinancing can shorten the length of your mortgage, lower your interest rate, or decrease your monthly payments.
The process can seem confusing, and it can be hard to know if refinancing is a good idea for you. We’ve compiled a guide with eight tips to help walk you through the process of how to refinance your mortgage loan.
Refinancing your mortgage can help you in a few ways. However, your goal for refinancing can dictate the mortgages that you apply for.
Most people have one of the following goals:
Decreasing monthly payments might not save you money over the life of the mortgage. In fact, it can extend your loan term, meaning you’ll potentially pay more in interest. What it does do, however, is help free up money in your budget that you might need each month.
If you find yourself unable to make your payments each month, or your financial situation has changed, this can be a good option to help re-organize your finances.
Lowering your interest rate has the desirable effect of decreasing the amount of money you pay over the life of the loan, thus costing you less.
Shortening your loan term also saves you money by decreasing the length of time you accrue interest. This is true even if you have the same interest rate. If your interest rate is the same, it might increase your monthly payments, though.
The best time to refinance your mortgage is when interest rates are low. Many financial institutions and lenders offer a service where you can receive notifications about falling interest rates. This is typically tied to fluctuations in the overall economy.
Knowing how much you owe on your mortgage and how much you’ve paid is important when you start shopping.
Also, check your current APR, and see if you have any prepayment penalties associated with refinancing.
Your credit score affects the mortgages you can qualify for. Particularly when interest rates are extremely good, loans can be competitive. Those with poor credit can be excluded from offers, as they are reserved for borrowers with the best credit.
If your credit score has fallen significantly since you took out your first mortgage, this can hurt your chances of refinancing at a better rate. If, however, your credit score has improved since you last shopped for mortgages, you could see significantly better rates.
With almost any large purchase in life, shopping around can help you get a good deal. Knowing what refinancing loans are available, what their average APR is, and the relative closing costs allow you to evaluate your options.
Keep a spreadsheet as you shop to help you keep track of the options you find.
Keep in mind, refinancing comes at a price. Usually, you can expect to spend anywhere from 2% to 5% of your principal to refinance your loan. Over the life of the refinanced mortgage, though, you can more than recoup those costs.
Use a refinancing calculator to determine how much money you’ll save by refinancing. Make sure you will earn back your closing costs to make refinancing worth it.
Most of the time, lenders will ask you for the following documents:
Proof of income: Usually in the form of pay stubs and tax documents.
Proof of assets: Documentation of your savings, stocks and bonds, real estate, and any other accounts.
Proof of debts and credit information: You’ll probably need to submit some information to verify your outstanding debt and your credit history.
Social security card/ ID: You’ll need to verify your identity.
Proof of insurance: You’ll need homeowners’ insurance and title insurance to refinance.
Appraisal/Inspection: Some lenders require you to have an appraisal done as well as a recent inspection.
You can get pre-approved for several refinancing mortgages enabling you to weigh the costs and benefits of what you can obtain. It’s a good idea to apply to 3-5 lenders so you have options to compare.
Once you’ve chosen a loan, you will begin the closing process. This is when you pay all the fees associated with refinancing. The title of your house will be transferred to the new lender and you’ll start payments on your new mortgage.
As you embark on the process of refinancing, we have more advice to help you on your journey.
Check out our resources on shopping for a loan, our competitive rates for refinancing, and calculators to help you figure out how much money you’ll save.
Your savings are federally insured to at least $250,000 and backed by the full faith and credit of the United States Government. NCUA, National Credit Union Administration, a U.S.Government Agency. We do business in accordance with the Federal Fair Housing Law and the Equal Credit Opportunity Act.
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