Mortgage refinance: What is it? How does it work?
Your home can be an investment. One way to make your home a more valuable investment is by refinancing. Refinance is possible for many reasons.
Let’s examine how refinancing mortgages work to help you understand what to expect.
What Does it Mean to Refinance a House?
Refinance your house mortgage is essentially trade in of your existing mortgage for a better one. Often, the newer mortgage will have a different principal and an interest rate. Your lender will use the newer loan to pay off your old mortgage, leaving you with one loan and one monthly repayment.
There are several reasons that homeowners refinance their homes. You can also use a term-and-rate refinance for a higher interest rate.
You can also refinance to remove someone from your mortgage. This happens often in divorce cases. You can also add someone to your mortgage.
How does Refinancing Your Home Work?
While the process of refinancing is typically simpler than that of home buying, it still involves many of the same steps. Although it is difficult to predict how long the refinance process will take this is a common timeline of 30 – 45 days.
Let’s take an in-depth look at the refinancing process.
This process begins with a review of the types of refinance options to determine the one that is most suitable for you. Refinance Sydney lenders will need the same information as to when you bought your home. Your income, assets, and credit score will be evaluated to determine if you can repay the loan and if you meet the requirements.
Some documents that your lender may require include:
- Two most recent pay stubs
- Two W-2s from the most recent year
- Two recent bank statements
If you’re married, your lender will need to see the documents of your spouse. If you are self-employed, your lender may ask for additional income documentation. It’s a good idea, too, to have the tax returns from the last two years.
Your current lender doesn’t require you to refinance. You can switch to a different lender if you decide to. The new lender will pay off your existing loan and end any relationship with your current lender. You should compare the current rates, availability, and client satisfaction scores of all lenders.
Lock in your Interest Rate
After approval, you might have the option to lock the interest rates so they don’t change until the loan closes.
Rate locks are for between 15 and 60 calendar days. Rate locks are determined by several factors such as your location, type of loan, and lender. If you don’t close your loan within the lock period, you might be required to prolong the rate lock. This may result in a fee.
There may be an option to float your rate. This means you don’t have to lock it before you apply for the loan. Although this may give you a lower rate than you would normally get, it can also increase your chances of getting a higher rate. Sometimes you may be able to get the best of both of them with a float-down option. But if you are happy with the rates at the moment you apply, then it’s a good idea that you lock your rate.
Your lender begins the Underwriting process once you have submitted your application. Your lender verifies all financial information you have provided and ensures that they are accurate during underwriting.
Your lender will confirm the details of your property, including when you bought it. The appraisal will determine the property’s worth. Because it determines your options, the refinance appraise is an essential part of this process.
The value of your home will affect how much cash you can get if you refinance to take cash out. If you want to reduce your mortgage payment, the value of your home can impact whether or not you are eligible to receive a loan option.
The appraisal must be obtained before you refinance, just as you did when your house was purchased. After your lender has ordered the appraisal, an appraiser visits your property to give you an estimate on the home’s worth.
Make sure you have your home in its best condition before the appraisal. Make sure you tidy up your home and make any repairs needed to make it stand out. A list of all the upgrades you have made to your home over the years is a great idea.
If the property’s current value is less than the loan amount, the underwriting is completed. Details of your closing will come to you from your lender.
What happens if the estimate is too low? You have the option to reduce the amount of money that you can obtain through the refinance. Or you can cancel your application. Another option is to do a cash-in refinance, which involves bringing cash to the table and lowering the amount of money you want to borrow.
Closing of your New Loan
It’s now time to close your loan once the underwriting has been completed. Your lender will send you a document called the Closing Disclaimer just a few days before closing. Here you’ll find all the final numbers regarding your loan.
Refinances close faster than home purchase closings. The closing is attended to by the title company or lender representative, as well as the title company and loan holders.