If you’re a homeowner looking for ways to get a lower interest rate mortgage, reduce monthly payments, switch to a fixed-rate loan or convert home equity into much-needed cash, then you should consider refinancing your home loan.
However, to evaluate the pros and cons of your situation, it’s important to understand how the process works before you decide to refinance. Many homeowners aren’t aware that there are refinancing options that require very little paperwork and are surprised at the ease of the process to get approved with the help of a guided professional.
To help you decide on refinancing your mortgage and which option makes the most sense to you, we will help you demystify how refinancing works and how it’ll contribute to your financial goals.
What is Refinancing?
In a nutshell, refinancing is the process of replacing an existing mortgage with a new loan. People decide to refinance their mortgage for a number of reasons including getting a better deal or rate, facilitating home renovations, consolidating existing debts, accessing additional home loan features and switching between variable or fixed rate.
Refinancing can offer numerous benefits and save you thousands of dollars in repayments, but it can be very risky if you aren’t aware of how it’ll work for you.
If you’re opting for mortgage refinancing but don’t know where to start, we’ve got you covered! Follow this 4-step guide to make the process easy and simple.
Step 1. Set your refinancing goals
Are you eyeing a lower interest rate and lower monthly payments? Are you interested in a shorter-term mortgage that will save you significantly in the long run? Did you build up enough equity to stop paying your mortgage insurance every month? Do you want to switch from an adjustable-rate mortgage to a fixed one? Or maybe you have got some other plans in mind.
Take time to rationalize. It’s best to talk to a mortgage broker first, to guide you accordingly and provide access to alternative refinancing programs that best fit your individual needs.
Step 2. Understand the major types of home refinancing
The new loan will allow you to lower monthly payments. In some cases, monthly payments don’t change at all but the loan term does. Here are the most popular home loan types you may want to consider:
Fixed-Rate. It’s the most common loan type with a mortgage rate that doesn’t change and provide predictable monthly payments over the life of the loan.
Adjustable-Rate Mortgage (ARM). Typically, this loan type starts at a very low rate for a period of time, after which it resets periodically, often every month or year.
Equity Take-Out. The equity is converted into cash, you can access and use the money for anything like paying off high-interest credit loans, renovation and education expenses or even a dream vacation.
Step 3. Gather up documentation
To ensure a fast and easy home refinancing process, have these documents available before you begin. Most lenders will require the following (documents may differ slightly by lenders):
- Pay Stubs. To assure the lender that you have the capability to make your mortgage payment
- Employment Letter. This is to verify the length of time and income.
- Tax Returns. Confirming your previous year’s earnings of taxable income.
- Credit Report. It’ll allow lenders to determine a potential borrower’s credit risk (the risk they run of not paying back their credit cards or loans).
Step 4. Getting the mortgage
Congratulations! You’re on your way to choosing a mortgage that works best for you.
Be sure not to open any credit during the refinancing process. Applying for new credit cards, car loans while on the hunt for new home refinancing can lead to unnecessary hurdles and can hurt your approval.
Refinancing is a serious financial step just like applying for your first home loan. Even if you’ve been through the mortgage process before, you might not be aware of all the options that can be tailored to help you gain access to funds and save you money. That’s why it’s best to consult a professional mortgage broker with your questions and concerns.
Let your broker do the grunt work for you. Why not take advantage of their experience, expertise and vast database of lenders?