11/15/2022
Deciding to refinance a mortgage may make sense when the Federal Reserve lowers rates or when you need more money. However, taking out a new mortgage loan for convenience also means you'll have to go through the process all over again.
Since we don't expect you to become a serial refinancer, we'll give you some tips on this process.
What should you consider when refinancing a mortgage?
Before establishing whether refinancing your home can be timely or not, you must understand that this process is not for everyone. You must first answer the following 3 questions:
Will I recoup my investment?
Refinancing a mortgage can be costly when you don't get an interest rate that works for the long term. Since you have to pay closing costs again, this adds 1 to 2% to the balance you borrow.
For example, a $300,000 USD loan costs you about $6,000 USD in fees. Ideally, you want to recover this money in 5 years or less, so you have to calculate how long it will take you to do so.
What are your financial goals?
The change in your monthly payments should be accompanied by an evaluation of your other financial goals, such as retirement funds, education or other projects. While refinancing could mean long-term savings, it's not worth it if the upfront costs leave you out of pocket.
Before paying fees again, we advise you to have 3 to 6 months of income liquidity to cover emergencies, vacations or unemployment.
How mature is your mortgage loan?
It is important that you think about how much you are going to end up paying with the new mortgage loan so you don't lose money with additional costs. If you've had a 30-year loan for 5 years, refinancing for the same amount of time could mean more interest at the end.
This also doesn't mean you should opt for a shorter term, especially when you are looking to reduce your monthly expenses. If you are not planning to sell or move, you should evaluate the effect of the rate on the life of the loan.
Check your credit score
You should already know that your FICO score will be a crucial element if you want to get a good deal. As of this year, 90% of people who got a mortgage had 650 or higher.
So the higher your score, the better your chances of getting a refinance. On the other hand, if you still owe more than 25% of the house, financial institutions will require a high score.
You also need to check that the debt-to-income ratio (DTI) is not above 43%. There is a possibility that the new mortgage loan fees will raise your DTI beyond what is accepted by most institutions.
Although you can theoretically assume the costs, banks prefer not to approve your application because of the risk involved.
Compare the best mortgage offers
In case refinancing your mortgage makes complete financial sense and you are certain to qualify for the best rates, it's time to compare banks and lenders.
The general recommendation for this process requires that you make 3 to 5 inquiries within a 2 week period so as not to impact your credit score as much.
Don't forget to do your research and ask for data on APRs, annual interest rates and possible extra fees. This way you can compare the total amount for each of your alternatives.
Gather the documents
Once you have chosen the bank or lender, you need to prepare the paperwork to make the application more attractive. You will need tax returns, W2 forms, pay stubs, proof of PMI and bank statements.
You may also be asked to provide a balance sheet related to your investment accounts. Double check that you are financially stable and remember that being organized will speed up the process.
Submit the paperwork to start the process
The process to refinance a mortgage is not complicated. You simply meet with the broker or bank advisor, lock in the rate and fill out the application. Then you submit the required documentation and from then on it is up to the underwriter to evaluate the information.
It is a process that can take from 2 weeks to 3 months, so you must be patient. When the subscription is finished, the only thing left to do is to sign the contract. There is usually a 3-day grace period after signing to repent and cancel the paperwork.
The reasons for refinancing a mortgage are varied, such as reducing the term, lowering the monthly payments and obtaining additional money. The most important thing is that it is an informed decision that does not affect your personal finances.
Español: ¿Cómo refinanciar un préstamo hipotecario?