What Does It Mean to Refinance a Home?
Tuesday, Jun 7 2022
As interest rates begin to climb, refinancing might make sense. In addition to bringing down your monthly mortgage payment, it can potentially help you access the built-up equity in your home.
While those are good reasons to refinance, it doesn’t make sense for everyone due to costs associated with refinancing. Before going through the process, you need to ask and understand the answer to the question, “What does it mean to refinance a home?”
What Does It Mean to Refinance a Home?
Refinancing is revising and replacing your existing home loan with a new one. You would consider refinancing to obtain a more favorable interest rate, payment schedule, or other terms.
Refinancing allows you to:
- Lower Your Interest Rate. Let’s start with the most popular reason for refinancing. Refinancing can lower your monthly payment if interest rates dropped since you got your mortgage. A general rule of thumb is, if you can reduce your interest rate by at least 2%, it’s a good idea.
- Pay Your Home Off Faster. Refinancing can help you pay your home off quicker. If you refinance from a 30-year loan to a 15-year mortgage, your monthly payment will increase. But your rate will be lower, and you’ll chop years off your mortgage.
- Eliminate Mortgage Insurance. If you put less than 20% down when you bought your home, you’re likely paying private mortgage insurance (PMI). If you’ve built up more than 20% equity in your home, you can refinance and cut out the PMI payment.
- Leverage Existing Equity. You can access your home’s equity through cash-out refinancing if you have more than 20% equity. You can use the equity for things like remodeling, home repairs, or paying your child’s college tuition.
- Lock-In a Fixed-Rate Mortgage. You can change from an adjustable to a fixed-rate mortgage. Locking in your interest rate is worth considering if you plan to stay in your home for at least a few more years.
Steps to Refinancing Your Home
Now that you know what it means to refinance a home, here’s more about the process. Knowing the steps to refinance will equip you to get approved quicker and find the plan best for you.
Step 1: Set a Clear Financial Goal
Have a good reason for refinancing. Know your financial goals, whether you want to reduce your monthly payment, shorten the loan term, or get equity for your home. Determine what benefits you want and know what you want to accomplish with a refinance.
Step 2: Check Your Credit Score and History
You need to qualify for a new loan. Credit requirements vary by lender, but the higher your credit score, the better rates you’ll receive. Lenders want to see a credit score of 760 or higher. If you have a low credit score, look for ways to raise your score before applying.
Step 3: Check Your Home’s Equity
Home equity is your house’s current market value minus your mortgage loan balance. The more equity you have, the better. Lenders look for at least 5% equity on conventional loans, but you’ll get better rates if you have more than 20% equity built up.
Step 4: Compare Lenders
Get quotes from multiple lenders. Compare interest rates and costs such as loan origination, appraisal, title insurance, and credit report fees. For a refinance to make sense, you’ll want to recover these costs over the long term. Calculate your break-even point by dividing closing costs by the money you save. For example, if your closing costs are $6,000 and your monthly savings are $150, your break-even point would be 40 months or about three years.
Step 5: Get Your Paperwork in Order
Gather your latest pay stubs, two years of federal tax returns, bank statements, info on property taxes, home insurance, and anything else your mortgage lender requests. You want to have all the paperwork ready to go when it’s time to submit it. Doing so will help your refinance get approved more quickly.
Step 6: Complete an Appraisal
An appraisal determines if the value of your home has gone up or down since you purchased it. Lenders require an assessment to assure you aren’t getting a loan for more than your home is worth.
Step 7: Prepare for Closing Day
If you move forward with refinancing, you’ll have a closing day, as you did on your first mortgage. Stay in contact with your lender in the days leading up to the closing to ensure necessary documents are in place. After your closing, store paperwork in a safe location and set up automatic payments for your new loan.
Refinancing With Focus Federal
Mortgage refinancing requires due diligence on your part. Work with a reputable lender to determine whether it’s right for you. Focus can help you understand what it means to refinance a home and choose the right time to refinance. Calculate your refinancing rate in Oklahoma and contact a Focus Federal lender.