Your home is one of the biggest- if not the biggest- investments you will ever make. One of the ways you can leverage that investment is to refinance. There are several reasons you may be considering refinancing- from getting cash from your home to reducing your monthly payment to decreasing your loan term.
If you are in or near Columbia, South Carolina, let Covenant Mortgage Services help you with your refinancing needs.
In this article, we’re going to look at how to refinance your home so that you are prepared.
Refinancing Explained: What Does it Mean?
First of all, you need to understand what refinancing is. When you refinance your mortgage, you are trading your current mortgage for a new one. Typically, there will be a new principal and a new (usually lower) interest rate. The lender uses the funds from the new mortgage to pay the old one off. This leaves you with one loan with one monthly payment.
Reasons to Refinance Your Home
Now that we know what it means to refinance your home- let’s take a look at some common reasons people decide they want to refinance their home. Once we’ve gone through these reasons, we’ll look at how to refinance your home. There are several reasons, including the following:
Lower your interest rate
The most common reason people decide to refinance their mortgage is to lower their interest rate. You are basically swapping your high rate for a lower one. This can save money on your monthly payments, and- over time- it can help you save thousands over the life of your loan.
Switch mortgage type
When you first bought your home, you chose either a 5/1 ARM, a 15-year fixed rate, or 30-year fixed rate. If you decide that you want to refinance, you can change the mortgage type to take advantage of benefits offered by a different type. For example, perhaps you started with and ARM that had great intro rates, but your rate is about to increase. If you switch to a fixed rate, you can lock in a rate that won’t change and you will have a consistent payment each month.
Maybe when you bought your home, you did not qualify for VA funding- now you do. You may wish to consider refinancing to take advantage of the benefits associated with a VA loan such as lower interest rates and no PMI. Then again, you may wish to switch from a 30-year to a 15-year fixed rate to get a lower rate and get your mortgage paid off faster.
Get money to improve your home
If there’s enough equity in your home and you have some much needed repairs/improvements that need to be done, you’ll want to consider a cash-out refi. You can use this money to add new siding, remodel your kitchen or bathroom, or any other home improvement project that’s been on your list for some time. This type of refinancing allows you to refinance your mortgage for more than you owe and then use the extra money how you choose.
Many homeowners choose this option instead of a HELOC (home equity line of credit) because the interest rates are typically cheaper. Plus, it replaces your existing mortgage, but a HELOC would be an additional loan on top of the one you already have.
Quickly increase equity
By shortening your loan, you reduce the part of the monthly payment that goes toward interest. This allows you to pay off the principal first- which means you build equity quicker. Quickly, a shorter loan comes with a lower interest rate. Depending on your current rate, you may be able to keep your payment the same- or even reduce it- while also paying down your loan faster.
How to Refinance A Home
While it’s true that refinancing and buying a home involve many of the same steps, you will find that typically refinancing is much less complicated than initially buying a home. We can’t really say exactly how long the process will take, but on average, the timeline is 30 to 45 days. Below, let’s explore how to refinance a home.
The first step is to consider your refinancing options to determine which one is best for you and your situation. When you apply, the lender will request the same information you submitted when you purchased the home. They will review your credit score, income, debt, and assets to determine whether or not you meet the requirements and will be able to repay the loan.
These documents include:
- Two recent pay stubs
- Two recent bank statements
- Two recent W-2s
If you are married and reside in a community property state, your spouse will be required to submit the same documents- even if they are not on the loan. South Carolina is not a community property state, so you don’t have to be too concerned with this. If you are self-employed, you’ll likely be asked for additional documentation related to your income. You may wish to be sure that you have your tax returns for the last couple of years.
You are not required to stay with your current lender. Don’t feel bad about shopping around and comparing rates, client satisfaction scores, and availability.
Lock in interest rate
When you are approved, you will be able to lock in the interest rate so that it won’t change before the loan closes. A rate lock can last 15 to 60 days. The period is influenced by a few factors, such as your lender, your location, and the type of loan you are under.
You may be offered a better rate if you opt to lock in the rate for a shorter period because the lender will not have to hedge against the market for as long. However, if the loan doesn’t close prior to the rate lock expiration, you may have to pay extra to extend the rate lock.
You may be able to float your rate, which means you don’t have to lock it down before moving forward. This allows you to get a lower rate, but it also increases your risk that the rate may change to a higher one. While the float down option may give you the best of both worlds, if you’re happy with the rates at the time of your application, it’s a good idea to lock it in.
Once your application has been submitted, the underwriting process will begin. During this time, your financial information will be verified, and the lender will ensure that your documentation is accurate.
The lender will verify property details, including when you purchased the home. This will include an appraisal to determine the value of the home. This is known as a refinance appraisal and is critical because it will narrow down your options.
For example, if you want to do a cash-out refi, your home’s value will impact how much money you can take out. If you want to lower your monthly payment, your home’s value will impact the loan options you are eligible for as well as whether or not you have enough equity to get rid of your PMI.
As we just mentioned, you’ll need to have an appraisal done, just as you did when you bought the house. An appraiser will visit the property and you’ll be given an estimate of the value.
To prepare, make sure your home looks good. Do a deep clean and make sure that you complete any minor repairs. You may also want to provide the appraiser with a list of upgrades made to the home since you bought it.
If the value is equal to or higher than your desired loan amount, underwriting is complete and the lender will contact you with closing details.
On the other hand, if the appraisal is low, you still have options. You can lower the amount of cash you want to get through the refinance, or you can cancel the application. Another option is a cash-in refi, which means you bring cash to the table to get the terms under the current deal.
Close on Your Loan
Once everything is done, it’s time to close. A few days prior to the closing, the lender will send you the Closing Disclosure. This will list all of the numbers for your loan. Closing on a refinance is a lot faster than closing on a purchase and will be attended by those on the loan and the title, as well as a rep from the lender or title company.
At closing, you will go over the loan details and sign the dotted lines. If there are any closing costs not rolled into the loan, this is when you will pay them. If the lender owes you money, you will receive the funds once the process is complete.
After closing, you have a few days (usually 3) before you get locked in. If you need to get out of it within those few days, you can exercise your right of rescission.
If you live in or near Columbia, SC, let Covenant Mortgage Services help you. We use a consultant approach to mortgages/refinancing. Bob Rankin, our owner, works directly with clients to determine the best solution for their goals/desires: whether that is buying a new home or getting funded for a remodel, a college education, or a car. His belief is not so much that the best mortgage is what you can afford- but what you can pay and still maintain your current lifestyle. Hopefully, you’ve learned more about how to refinance your home- and also a few reasons why you want to consider this.