How To Refinance Your Home Loan In 5 Steps
Refinancing a home loan essentially means getting a new mortgage to replace an existing one. While it does take some time to accomplish, it has several merits to those who do so.
For one, refinancing allows you to get a mortgage with a lower interest rate than that of the loan you originally had. You can also go for those with lower monthly payments. These are just a few reasons why people like to refinance their loans. But as one might imagine, not only is it a hassle, there's always a chance you'll end up with a much worse mortgage.
In that regard, this article will go over the five basic steps of refinancing a home loan, or any mortgage, for that matter, that would guarantee a satisfactory outcome.
Step #1: Consolidate Your Credit Score
While there's still no explicit explanation or formula as to how credit score affects home loans, there's no denying that it indeed has an influence. More precisely, the higher your credit score, the more likely you are to qualify for loans with low-interest rates. If your credit score is high enough, there's a good chance you can opt for mortgages with various rewards.
For that reason, your first step to refinancing your home loan for lower interest rates would be to consolidate and, if possible, improve your credit score. And here's how you can do that:
- Regularly check your credit score
- Make sure you pay on time
- Pay your credit card balance in full each month
- Limit your applications for new credit or loans
- Don't close old credits
Step #2: Compare The Rates Of Different Lenders
Next, you'd want to compare the rates of different lenders. Nowadays, comparing mortgage options is made easy and convenient through an online home loan calculator. Doing so also ensures you that you will actually benefit from refinancing the loan and help you come up with a better decision.
Aside from home loan calculators, there are several ways to do this. Here are a few examples:
- Commission a mortgage broker as a middleman
- Go to comparison websites or platforms
- Look up the average interest rate for a given term type and length
Since you've already dealt with your credit score, it should be pretty easy to qualify for their offers, although some lenders may have incredibly high credit score standards.
Step #3: Prepare The Necessary Documents
As always, refinancing involves a lot of paperwork. And much like most processes, it's best if you prepare them early on. Here's a list of documents you may need for this particular transaction.
- Pay stubs from your employers from the past few months or any sort of document that will prove your source of income
- Copies of your tax returns and W-2 and 1099 form reports
- A copy of your homeowner's insurance
- Recent statements from investment, retirement, and checking/savings accounts
- Debt statements
Some lenders may require additional paper, but this should be the bare minimum.
Step #4: Decide On The Loan Terms
Now, you should have everything you need to apply for refinancing. The next thing you have to do is simply decide your new home loan terms.
This would include the type of mortgage rate and the length.
- Types of mortgage rates: There are two types of mortgage rates: (1) fixed-rate and (2) adjustable rate. As the name implies, a fixed-rate mortgage is when the interest rate remains the same for the entire loan term. However, with an adjustable-rate, it may change according to a specific benchmark agreed upon by you and the lender.
Fixed-rate mortgages are an excellent choice if you want to be able to predict your expenses. Adjustable rates, on the other hand, are ideal if you think the interest rate is likely to decrease in the future. Either way, this would depend on your situation.
- Mortgage term length: The term length is essentially how long you have to pay back the loan. A longer-term would result in a lower monthly payment, and vice versa.
For your reference, the most common term length is 30 years, but you may also choose to go for a much shorter term, which is ten years.
Step #5: Prepare For The Appraisal
Once you decide on the mortgage terms, you only have to prepare for the appraisal.
An appraisal is basically when the lender checks your real estate property and estimates its market value based on several factors, such as its location, condition, and many more.
It would also indicate how much the lender is willing to give you as a loan. Since the condition is one of their deciding factors, make sure you clean the property and make it as presentable as possible.
With these steps, you should no longer have any difficulty refinancing your home. Moreover, you can minimize your likelihood of refinancing for a mortgage with much worse terms than your existing one. Granted, it would still be a bit of a hassle, but you should no longer feel like grasping at straws.