Refinancing Your Home: Know the Process
(Updated November 2014)
Billions of dollars are spent by companies in an effort to find easier, less expensive methods to manufacture their products. If you're savvy, you can operate in a similar fashion when it comes to refinancing your mortgage. By following an efficient, proven process, you can wind up with a terrific mortgage refinance in the end. Since you're the CEO of your home's refinance process, here are some steps that will improve your bottom line:
Is it a good time?
The first step in refinancing is asking yourself whether it's a good time to do so. Can you save enough to make it worthwhile? Generally, you want to be able to save at least a full percentage point by refinancing on a 30-year fixed-rate mortgage to make it worthwhile. Do you plan to remain in the home for several years? If you're going to move in five years or less, refinancing may not be worthwhile. Thinking about refinancing to shorter term? Make sure you've paid down enough of your loan balance so that shortening your loan term won't drive up your payments too far. Of course, the lower rates available by shortening your loan term can help here.
Check your credit
What sort of credit do you have? Do you have a FICO score of 740 or above? If not, you may not be able to get the best rates available. Is your score 680 or lower? You may have a hard time or find it expensive to refinance into a conventional loan backed by Fannie Mae or Freddie Mac. With a lower credit score, you may find your best bet is an FHA refinance, even if your current mortgage isn't an FHA loan.
Check your equity
This is one of the major keys to refinancing - you can't do a conventional refinance without home equity, that is, unless your home is worth more than what you owe on your current mortgage(s). Generally speaking, 20 percent is the minimum equity you want in order to do a conventional refinance.
If you have less than 20 percent equity, you still have options. The primary one of these is a HARP refinance through the federal Home Affordable Refinance Plan. This government program is specifically designed for borrowers with little or no home equity - you can even refinance if you owe more than your home is worth (negative equity, also called being "underwater" on your loan). It's only available on mortgages backed by Fannie Mae or Freddie Mac. Be advised though; the program expires at the end of 2015, so don't waste time.
Sort your options
There are a lot of choices available when you refinance. What are you looking to do? Do you want to shorten your term, as mentioned above? Maybe you want to stretch it out to reduce your monthly payments? Would it be useful to borrow against your home equity when refinancing, as in a cash-out refinance? Are you going to refinance into a Fannie Mae/Freddie Mac conforming mortgage, or is an FHA loan a better choice, or can you use a VA program? Are you sure you want a fixed-rate loan or might an adjustable-rate mortgage (ARM) be a better choice in your situation?
While home mortgage shopping might not be everyone's idea of a good time, it can save you big bucks. You can shop via the web or the phone book, or by asking friends for referrals. You'll want to discover a lender's rates, closing costs, and how long they've been in business. A word to the wise: To get a lender's best mortgage quote, let them know that you're shopping around.
The price should be right
After you've gathered all the mortgage quotes, do some serious number crunching. Ask yourself if a refinance makes sense for your personal situation. Take a close look at the term of the loan-do you think you'll be in the house for long? Will the monthly payment fit your budget? Spend some time making sure the loan proposal is the right one for you and your family. If it is, go ahead and select your lender.
Get your house in order
This refers to financial records, not house cleaning. All the documents that were required on your first loan will likely be needed again. This includes income statements, recent paycheck stubs, homeowner's insurance documents, bank statements, and investment statements. A lender will be happy to provide you with a complete list of what you'll need to provide.
Following these tips, you can put together a plan for an efficient home mortgage refinance. As the CEO of your homestead, it's up to you to put this winning plan into action.