Deciding to refinance a mortgage can make sense when the Federal Reserve lowers rates or when you need more money. However, taking out a new home loan for convenience also means that you will have to go through the process all over again.
Since we do not expect you to become a serial refinancer, we will give you some clues about this process.
What should you consider when refinancing a mortgage?
Before establishing whether or not refinancing your home may be timely, you should understand that this process is not for everyone. You must first answer the following 3 questions:
Will I get my investment back?
Refinancing a mortgage can be expensive when you can’t get an interest rate that works for the long term. As you have to pay the closing costs again, this add between 1 and 2% to the balance you request borrowed.
For example, a credit of $ 300 thousand USD costs you about $ 6,000 USD in commissions. The ideal is to recover this money in 5 years or less, so you have to calculate how long it will take you to do it.
What are your financial goals?
The change in your monthly payments should be accompanied by an evaluation of your other financial goals, such as funds for retirement, education or other projects. While refinancing could save you long-term, it’s not worth it if up-front expenses leave you penniless.
Before paying the commissions again, we advise you have a liquidity of 3 to 6 months of income to cover any emergency, vacation or unemployment.
How mature is your mortgage credit?
It is important that you think about how much you will end up paying with the new mortgage so as not to lose money with additional costs. If you’ve been on a 30-year loan for 5 years, refinancing for the same time could mean more interest in the end.
This also does not imply that you should opt for a shorter term, especially when you are looking to reduce your monthly expenses. If you are not thinking of selling or moving, you should evaluate the effect of the rate on the life of the loan.
Check your credit score
You should already know that you FICO score it will be a crucial element if you want to achieve a good agreement. For this year, 90% of the people who got a mortgage had 650 or more.
Therefore, the higher your score, the better chances you will have of obtaining a refinancing. On the other hand, if you still owe more than 25% of the home, financial institutions they will demand a high score from you.
You also need to check that the debt-to-income ratio (DTI) is not above 43%. There is the possibility that the installments of the new mortgage loan raise your DTI beyond what is accepted by most institutions.
Although in theory you can bear the costs, banks prefer not to approve the application due to the risk that this implies.
Compare the best mortgage deals
If refinancing your mortgage makes complete financial sense and you are confident that you qualify for the best rates, it’s time to compare banks and lenders.
The general recommendation for this process requires that you make 3 to 5 inquiries within a 2-week period so as not to impact your score credit.
Don’t forget to do your research and request data on APRs, annual interest rates and possible extra commissions. So you can compare the total amount for each of your alternatives.
Gather your documents
Once you have chosen the bank or lender, you must prepare the paperwork to make the application more attractive. You will need tax returns, W2 forms, pay stubs, proof of PMI, and bank statements.
They may also ask you for a balance related to your investment accounts. Double check that you have financial stability and remember that being organized will speed up this process more.
Deliver the papers to start the process
The process to refinance a mortgage is not complicated. You simply meet with the bank’s broker or advisor, lock in the rate, and fill out the application. Then you deliver the required documentation and from then on it is up to the subscriber to evaluate the information.
It is a procedure that can take 2 weeks to 3 months, for which you must be patient. When the subscription ends, it only remains to sign the contract. There is usually a 3 day grace period after signing to repent and void the paperwork.
The reasons for refinancing a mortgage are varied, such as reducing the term, lowering the monthly payments and obtaining additional money. The fundamental thing is that it is an informed decision that does not affect your personal finances. For this you can rely on the Business Blog comparator and our experts.