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home refinance

home refinance

Your home is an investment. Refinancing is one way you can use your home to leverage that investment. There are several reasons you may want to refinance, including getting cash from your home, lowering your payment and shortening your loan term.

Let’s look at how refinancing a mortgage works so you know what to expect.

What Does It Mean To Refinance A House?

When you refinance the mortgage on your house, you’re essentially trading in your current mortgage for a newer one, often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment.

There are a few reasons people refinance their homes. You can use a cash-out refinance to make use of your home’s equity or a rate-and-term refinance to get a better interest rate and/or lower monthly payment. A refinance could also be used to remove another person from the mortgage, which often happens in the case of divorce. Finally, you can even add someone to the mortgage.

How Does Refinancing A Home Work?

The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. It can be hard to predict how long you are refinance will take, but the typical timeline is 30 to 45 days.

Let’s take a closer look at the refinancing process.

Applying

The first step of this process is to review the types of refinancing to find the option that works best for you. When you apply to refinance, your lender asks for the same information you gave them or another lender when you bought the home. They’ll look at your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan.

Some of the documents your lender might need include your:

  • Two most recent pay stubs
  • Two most recent W-2s
  • Two most recent bank statements

Your lender may also need your spouse’s documents if you’re married and in a community property state (regardless of whether your spouse is on the loan). You might be asked for more income documentation if you’re self-employed. It’s also a good idea to have your tax returns handy for the last couple of years.

You don’t have to refinance with your current lender. If you choose a different lender, that new lender pays off your current loan, ending your relationship with your old lender. Don’t be afraid to shop around and compare each lender’s current rates, availability and client satisfaction scores.

Locking In Your Interest Rate

After you get approved, you may be given the option to lock your interest rate, so it doesn’t change before the loan closes.

Rate locks last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender. You may also get a better rate by opting to lock for a shorter period of time because the lender doesn’t have to hedge against the market for as long. Be warned, though: If your loan doesn’t close before the lock period ends, you may be required to extend the rate lock, 

which may cost money.

You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This feature may allow you to get a lower rate, but it also puts you at risk of getting a higher one. In some cases, you might be able to get the best of both worlds with a float-down option, but if you’re happy with rates at the time you’re applying, then it’s generally a good idea to go ahead and lock your rate.

Underwriting

Once you submit your application, your lender begins the underwriting process. During underwriting, your mortgage lender verifies your financial information and makes sure that everything you’ve submitted is accurate.

Your lender will verify the details of the property, like when you bought your home. This step includes an appraisal to determine the home’s value. The refinance appraisal is a crucial part of the process because it determines what options are available to you.

If you’re refinancing to take cash out, for example, then the value of your home determines how much money you can get. If you’re trying to lower your mortgage payment, then the value could impact whether you have enough home equity to get rid of private mortgage insurance or be eligible for a certain loan option.

Home Appraisal

Just like when you bought your home, you must get an appraisal before you refinance. Your lender orders the appraisal, the appraiser visits your property and you receive an estimate of your home’s value.

To prepare for the appraisal, you’ll want to make sure your home looks its best. Tidy up and complete any minor repairs to leave a good impression. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.

If the home’s value is equal to or higher than the loan amount you want to refinance, it means that the underwriting is complete. Your lender will contact you with details of your closing.

What happens if your estimate comes back low? You can choose to decrease the amount of money you want to get through the refinance, or you can cancel your application. Alternatively, you can do what’s called a cash-in refinance and bring cash to the table in order to get the terms under your current deal.

Closing On Your New Loan

Once underwriting and home appraisal are complete, it’s time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. That’s where you’ll see all the final numbers for your loan.

The closing for a refinance is faster than the closing for a home purchase. The closing is attended by the people on the loan and title and a representative from the lender or title company.

At closing, you’ll go over the details of the loan and sign your loan documents. This is when you’ll pay any closing costs that aren’t rolled into your loan. If your lender owes you money (for example, if you’re doing a cash-out refinance), you’ll receive the funds after closing.

Once you’ve closed on your loan, you have a few days before you’re locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.

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