When you bought that house, it probably seemed like we’d be in a low-rate environment forever. And since mortgage rates have been near historic lows for a couple of years, it probably seemed safe to get an adjustable-rate mortgage.
Now, though, you might be a little bit worried. Since the U.S. presidential election of Donald Trump, mortgage rates have shot up. In fact, they went up practically overnight.
With mortgage rates likely to increase in 2017, now might be the time to refinance a mortgage that could become more expensive than you thought.
Just like buying a home is a big deal, refinancing one requires a lot of legwork. So as you learn how to refinance a home, take some time to ask yourself the following seven questions. Then you’ll be ready to take on the process like a pro.
1. Wait, so I’m getting a new mortgage?
Before you figure out how to refinance a home, you need to understand that when you refinance, you are actually getting another mortgage.
Essentially, you’re getting a new mortgage on your home and using it to pay off your current mortgage.
The hope is that your new mortgage comes with a lower interest rate — and a lower monthly payment. So if you have an adjustable rate, you’re now locking in a fixed rate to protect you against further interest rate rises.
Keep in mind that since you are getting a whole new mortgage when you refinance, you will most likely have to jump through a few hoops before the process is over.
2. What are the advantages of home refinancing?
The biggest advantage to refinancing your home would be the reduction in your interest rate, especially if your credit wasn’t great when you originally bought it.
Even with rising mortgage rates, if you can save on interest, it might make sense to refinance.
Some homebuyers also like the idea of refinancing so they can pay off their loan sooner. So if you’re trying to become debt-free, refinancing for a shorter term can help.
Refinancing can also lock in your mortgage rate. Perhaps you have an adjustable rate and are worried about paying more down the road.
Locking in your rate now can save you money in the long-run. Plus, you have the advantage of knowing exactly what your payment will be. You won’t have to worry about changing your budget when your rate adjusts.
Finally, refinancing can help ease your cash flow. That’s because in many cases refinancing a mortgage results in a lower monthly payment. This can ultimately free up some breathing room in your budget for other expenses.
3. Is my credit factored in at all?
Remember when you bought your home, and your credit was hugely important? It still is. Your credit definitely matters when you refinance a mortgage.
Perhaps now that you’ve been a homeowner for a few years, you’ve let your credit slip a little bit. You feel like you don’t have to be as vigilant and as a result, your credit score’s gone down.
Take some time to check your credit to see if you need to improve it. Review your credit report to see if there are errors holding you back. And tackle some of your debt if you can.
Overall, it’s a good idea to improve your credit so that you qualify for the best available rates when you decide to refinance.
4. Why is my LTV important?
Before you refinance, you need to know your loan-to-value (LTV) ratio. In many cases, you can’t refinance a mortgage if you owe more than 80 percent of your home’s value. So if you have a high LTV, you might be denied for refinancing.
However, if it’s possible for you to make a cash payment when you apply for refinancing, that could improve a lender’s view of your LTV. This is one way to get your refinancing request pushed through. It’s sort of like making a down payment on your home.
5. What sort of documentation do I need?
Because refinancing is like getting a mortgage, you need all the same documentation as before.
The lender will also check your credit and look into other details of your financial situation. Some of the items you need to share include:
- Investment account statements
- Bank account statements
- Pay stubs or other proofs of income
- Tax returns
You’ll also need to share the information on your current mortgage. So it helps to have the lender information and account number handy.
When I went through the process of refinancing my home, I had to explain large deposits and transfers in and out of my account — just like I did with my original mortgage.
Ultimately, your lender wants to make sure that you aren’t borrowing heavily to make it look like you have plenty of assets. My transfers were explained with the help of PayPal statements showing my freelance income.
6. How long does it take to refinance a mortgage?
It’s not uncommon for the refinance process to take between two weeks and eight weeks. It can take even longer, depending on your financial situation.
You can speed things along by having all of the right documentation prepared. Therefore, make sure you know exactly what you need and gather it as quickly as possible.
Also, thanks to technology, it’s possible to move things along with the help of digital documentation.
I refinanced my mortgage completely through an online process. I just had to scan my documents and upload them into a secure folder hosted by the lender.
Overall, my refinance took about four weeks from beginning to end. Although a notary was still required to sign a mound of paperwork, the lender arranged for him to come to my home, so it was convenient.
As digital documentation becomes more commonplace, it’s likely that the home refinancing process will become even more streamlined.
7. How to refinance a home through HARP: what do I do?
You can reduce the time involved and the documentation hoops you have to jump through when you refinance a mortgage using the Home Affordable Refinance Program (HARP).
This program was put in place after the crash of 2008. It’s designed to help responsible homeowners who find themselves with LTVs too high for lenders to consider.
If your LTV is above 80 percent — and even if you owe more than your home is worth — you might be able to refinance with the help of HARP.
HARP was meant to be temporary, but it’s been extended a few times. Currently, the program is extended through September 2017, so there’s still time to refinance if you are eligible.
However, you need to have originated your loan on or before May 31, 2009. So if you’re a recent homebuyer, HARP won’t be much use to you.