A How-To Guide to Refinancing Your Home

There are various reasons why you should refinance your mortgage, including lowering your monthly payments, switching to a fixed rate, or borrowing against your home equity to get a cash out. The refinance process is a bit different from the normal mortgage process. Here are the steps towards successfully refinancing your existing mortgage.

Step 1: Determine the Right Loan for You

There are various loans that you can use to refinance your existing home mortgage. It is up to you to decide the one that suits your needs. To do this, you need to determine what is working for you in the current mortgage and the improvements you would like to make.

Remember, it is not the loan that decides the type of home you end up with; but your home is the one that decides the type of loan you choose.

There are various types of loans you can use for refinancing an existing loan. You can choose a fixed-rate loan or an adjustable-rate mortgage, a 15-year or a 30-year mortgage, or even go for an interest-only mortgage. The choice depends with what you are looking for and your qualifications.

To determine the type of loan you can qualify for, obtain your credit report and credit score, gather proof of income and prepare a summary of your debts.

Step 2: Perform a Market Comparison

There are various loans on the market. You need to make sure that the loan you choose fits your overall budget. One way to do this is to perform comparison loan shopping.

Here, you get to check out the fees charged by the lender, the interest rates, down payment, monthly payments, and the loan features. The loan features such as term, interest rate deduction for auto draft, no prepayment penalty, etc.You also check out the flexibility of the loan, such as alternative payment plans. Speak to severallenders to understand these aspects of the loan and choose the best loan for you.  You can compare lenders summary of refinance rates to make your comparison quick and easy.

These features vary according to the loan type and the amount you apply for. Some of the aspects such as the closing costs can be covered by the seller. Consider this when performing market comparison.

Step 3: Submit the Loan

Refinancing a loan is all about clearing an existing loan and taking onto a new loan. This means that you start on new terms and new payments. This means you start the loan process afresh. You have to complete the formal loan application by filling in a form and attaching the necessary documentation.

The documents you need to submit include latest bank statements, W2s, and paystubs. If you are self-employed, attach your tax returns and asset documentation.

After this, the loan goes for underwriting. If it meets the conditions, it goes to the next step otherwise the underwriter can return it for compliance.

Step 4: Have the Property Valued

Your property has definitely changed since you bought it. This is why the lender performs an appraisal on the property. The role is to determine your loan to value (LTV) ratio, which is the ratio of the unpaid principal against the home appraisal value. To be on the safe side, the LTV requires to be 95 percent and below. If you have an LTV of more than 80 percent, you might have to pay private mortgage insurance on the loan.

The aim of appraisal is also to determine the current market value of the property. The lender usually uses the sales comparison approach. Here, the lender compares 4-5 properties within a 1-mile radius. The properties that are used in the comparison need to have the same square footage. The appraiser also checks the property condition, the location, and any upgrades. The result of all these is an appraisal report.

Step 5: Get Your Loan Approved and Receive the Settlement

After the valuation and submitting the support documents, the lender approves your loan request. The lender can request for additional documentation as necessary. After this, the lender settles the loan amount, which means you can now access the funds you applied for.

These are not the definitive steps. They can change depending on the loan type and the requirements by the lender.

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