Should I Refinance my Home? How does it work..?
The mortgage refinance rush is on. With interest rates at their lowest point in decades, millions of homeowners are trying to refinance their homes to save money. Some are trying to “escape” their adjustable-rate mortgages, while saving money at the same time. But how does home refinancing work, and when is it a good idea? These are the questions We’ll address in today’s lesson.
Before we get to the actual steps of how refinancing works, I need to make an important point about current events. Depending on where in the U.S. you live, there’s a chance you might not be able to refinance your home at all. It has to do with equity. Property values have fallen significantly in many cities across the country, and this affects the homeowner’s ability to refinance. If you don’t have enough equity in the home, refinancing might be out of reach — for the time being, at least. With that “disclaimer” out of the way, let’s take a look at how home refinancing works and when it’s a wise move.
How a Mortgage Refinance Works
This process will vary slightly from one homeowner to the next, based on many factors. But generally speaking, this is how refinancing works for most people.
Step 1 – Determine Your Home’s Value
First of all, you should find out how much equity you have in your home (if any). In order to do this, you need to determine the current value of your house. I can’t stress the “current” part enough — what you paid for the home several years ago is irrelevant in the current economy. The best way to do this is to pay for a professional appraisal. Your lender will do this when you apply for a refinancing loan, but it’s wise to do it for yourself before you even begin the process.
Step 2 – Determine Your Home Equity
Once you have an idea of your home’s value (step 1 above), you’ll can determine the approximate amount of equity you have in your home. To do this, you’ll need to find out how much you currently owe on your mortgage loan (the unpaid balance). If you don’t know off hand, you can contact your lender to request this information. If you have a second mortgage on the home, you’ll need to find out how much you owe on that as well. Subtract the amount you owe from your home’s current value (step #1), and you’ll know how much equity / ownership you have.
In the current economy, most lenders will require you to have at least 20% equity in order to refinance. And with the current state of the economy, this is the #1 obstacle most homeowners face. A lot of people are now underwater in their mortgages, meaning they owe more than the home is worth.
If you have less than 20% equity in your home, but you are not underwater by more than 5%, you might be able to refinance with government assistance.
Step 3 – Check Your Credit Reports and Scores
Remember when you applied for the original loan to buy your home, when the lender put your finances under the microscope? You’ll go through that same process when you attempt to refinance your home. In addition to your equity level, the lender will review your credit score. If you want to qualify for the best rates on a refinance loan (which is the whole point), you need to have an excellent score — upward of 750 in most cases.
Check your credit reports to make sure there are no errors in them. This can hurt your FICO score, which in turn can hurt your chances of qualifying for the best rates. If your score is low, you need to focus on improving it before you apply for a refinance loan. Some people think it takes years to make significant improvements in a credit score. But this is not always true. Here are some things you can do to raise your score quickly.
Up to this point, you have mostly focused on background research — determining your home’s value and your level of equity, checking your credit reports and scores, etc. Now you are ready to move forward into the application side of things. Here’s how home refinancing works at this stage:
Step 4 – Get Refinancing Quotes from Lenders
Once you’ve done the necessary research (outlined above), you should start getting quotes from mortgage lenders. You can’t move on to step #5 below until you get some rate quotes. Fortunately, this part of the process has gotten much easier over the years. Thanks to the Internet, you can get refinance quotes by filling out a short form online. You can even start today, by using the link provided at the top of this blog post.
Step 5 – Find Out if Refinancing Makes Sense
Some homeowners think it’s always a good idea to refinance. It saves money in all cases, right? Wrong. The key to mortgage refinancing is to save more money over the life of the new loan than you spend in closing costs. Yes, many of the same closing costs from your original loan will apply to your refinance as well. So there are scenarios where refinancing does not makes sense — such is the case when you pay more in fees than you save in interest rates.
This is where the Internet comes to the “rescue” again. You can find a variety of refinancing calculators online that will tell you how much you might save, based on the interest rate you’ve been quotes (step #4).
Source: www.armingyourfarming.com