If you have an existing home loan, refinancing could be an option for you. There are plenty of reasons why someone would want to refinance their mortgage, and the most common reason is to get lower interest rates and make lower monthly payments. Before you contact your lender to talk about the possibility of refinancing, be sure you have all of the information you need to make an informed decision. Here are some basics about refinancing and the process that you need to know.
Plan to Pay Closing Costs
Much like when you first purchased your home, there are usually closing costs involved in the refinancing process. Most lenders will add these costs on to the total of your current loan amount, which is referred to as "rolling it in" to your existing loan. Most closing costs to refinance are lower than initial closing costs, but they are still charged as a fee for the services you're receiving to have the loan refinanced.
You Can Adjust Your Terms
Aside from getting a lower interest rate, now is your opportunity to think about changing the terms. If you had a 30-year mortgage before, you can opt to change it over to a 15-year. You can also decide whether or not you want to refinance as an interest only loan or choose to have an ARM (Adjustable Rate Mortgage). Before you settle on a new mortgage type, be sure you understand how this will affect your overall payments and how much money will be going towards the principal.
Make Sure You're Eligible
Just because you currently own your home doesn't always mean you will be eligible to get it refinanced. Perhaps you've changed jobs and your income has decreased or your credit isn't as stellar as it used to be. These factors can have a real impact on your ability to refinance. A new credit report will be run and the lender will need to have an updated employer and income history before they decide if you will be approved for the refinance. Make sure you have your credit and finances in order before you apply.
Prepare for an Appraisal
Most lenders need to perform another appraisal on your home to determine its current market value. Since the real estate market fluctuates, the lender needs to be sure your home has held its value. The appraisal cost is usually added onto the cost of the newly refinanced loan and won't be too expensive, but you might find that the home you live in has decreased in value, and the loan amount could potentially change.