In this article, we will be exploring the option of refinancing your mortgage on your home in an effort to either save money, decrease your accrued interest payments long-term, and how to switch from and adjustable-rate loan to a fixed-rate loan. Depending on your overall goal and position, there are many different ways to refinance
After you have bought your home and have built up a sufficient amount of time paying down your debt and making on time payments to your lender, it may be a good time to start looking at your refinancing options. In order to begin the process of refinancing, you need to qualify for the loan you find most attractive, similar to how you needed to meet the lenders requirements for the initial mortgage. You will need to once again file an application, go through the underwriting process and go to closing, just as you did when you originally bought the home.
Now, before you begin, remember that when refinancing, your goal will guide the process from the very beginning. Here are a couple different reasons as to why you may want to refinance:
Reduce the monthly payment.
When your goal is to pay less per month, you can refinance into a loan with a lower interest rate, or you can extend your loan term, say from a 15 year to a 30 year. However, the drawback to extending the term is that you will inevitably pay more interest in the long run.
Tap into equity.
When you refinance to borrow more than you owe on your current loan, the lender will give you a check to make up the difference, known as a cash-out refinance. Borrowers often get a cash-out refinance and a lower interest rate at the same time.
Pay off the loan faster.
If you currently have a 30-year mortgage, and are looking to move into a 15-year, be sure to consider the fact that eve though you will be paying off the loan in half the time, one major downside is that monthly payments will increase.
Get rid of FHA mortgage insurance.
While private mortgage insurance on conventional home loans can be cancelled, the Federal Housing Administration (FHA) mortgage insurance premium you end up paying with an FHA loan can not. The only way to get rid of FHA mortgage insurance premiums is to either sell the home or refinance the loan when you have accumulated enough equity. To calculate your home equity, estimate your home value and subtract your mortgage balance.
Switch from and adjustable- to a fixed-rate loan.
Interest rates on adjustable-rate mortgages can increase over time, whereas fixed-rate loans stay the same. Refinancing from ARM to a fixed-rate loan provides financial stability.
After you’ve decided on the best refinancing option for you, it’s time for a little legwork. At this point, you want to shop for the best refinance rate that fits your goals, and get a loan estimate from each lender. Each potential lender is required to issue the estimate within three days of receiving your basic information. The loan estimate is a simple three-page document that details the loan terms, projected payment, estimated closing costs and any other fees you may accumulate.
For ease of transitioning into refinancing, I have broken the process down into these easy-to-follow steps:
Set your goal.
Reduce monthly payments? Shorten the term of your loan? Dissolve FHA mortgage insurance?
Shop for the best mortgage refinance rate.
Keep an eye on fees too.
Apply for a mortgage from four or five different lenders.
Submit all applications over the course of a two-week period in an effort to minimize the impact on your credit.
Choose a refinance lender.
To pick the best offer, compare the initial Loan Estimate each lender has provided, which will tell you how much cash you’ll need for closing costs.
Lock your interest rate.
When you lock the interest rate, it will not be changed during the duration of a specific time period.
Close on the loan.
This will look familiar to when you took out your original mortgage, as now you will pay all closing costs that were listed in the Loan Estimate and again in the Closing Disclosure. Closing on a refinance is very similar to closing on a purchase loan.
When it comes down to the nitty-gritty, there are definitely pros and cons to refinancing your current mortgage, so the best advice I can impart to you is to just do your own research. See if refinancing is the best fit for you and your household, and look to see if it makes the most financial sense.
Do you have any further questions? Reach out to our experienced team at Vertex Realty Partners and we will be happy to help!
Or stop into our centrally located office at:
601 Main St. Suite B
Grand Junction, CO 81501