In the fluctuating economy of today’s day and age, many citizens often look for ways that can help them reduce their monthly expenses. Refinancing a mortgage can be one of the most effective strategies that may help them in the long run. This will not only help them save money but will also provide them with an opportunity to readjust their loan according to their current financial status. This article will brief you on how refinancing a mortgage in the US for lower rates works and what steps you must take to ensure that you make an informed decision.
What Do We Mean By Refinancing a Mortgage?
Refinancing a mortgage in the US in simple words is replacing your current existing mortgage with a new one in order to secure lower interest rates, reduce the monthly payment that has to be done, change the loan term, switch from an adjustable to a fixed-rate loan, or access equity in your home. This is usually done by applying for a fresh loan in order to pay off the original mortgage. It also comes with additional costs like closing fees and appraisals. The main objective of doing the entire process is to readjust and adapt our loan structures to improve our current financial status and changing needs.
When to Refinance a Mortgage?
The timing of refinancing a mortgage in the US largely depends on the current condition of the market. If there is a fluctuation in the mortgage rates because of the forces of the market and they fall lower than the original rates of your loan, you may refinance your mortgage. But if the current mortgage rates in the market are higher than that of your original rate, refinancing would not make any sense. Even if your goal is to get rid of the FHA mortgage insurance premium, if the mortgage rates are currently high, it is best to not go for refinancing and continue with your original mortgage rates.
What Are the Costs of Refinancing a Mortgage in the US?
Refinancing a mortgage in the US will cost you a closing fee of 2% to 6% of the balance that is still left for clearance in your previous loan. It is almost the same as the purchase cost you might pay. Let us understand this with an example. If we assume that the amount left for clearance in your previous loan is $400,000, you would be charged a closing fee somewhere between $8,000 to $36,000, depending on the lender so you might want to shop around a bit in order to crack the best deal. You may also owe a mortgage prepayment penalty to your current lender. This is the fee some lenders may charge if you pay off the entire amount of the loan within a period of the first three to five years of getting the loan.
What are the Steps to Refinancing a Mortgage for Lower Interest Rates?
In order to successfully refinance a mortgage in the US for a lower interest rate, you may follow the set of steps given below.
Step 1: Check Your Credit Score
Your current credit score plays a vital role in the process of refinancing your mortgage. A high credit score will help you get the most convenient interest rates in the market. Hence, you must check your credit score with the help of any reputable source and then also review it for any errors. A credit score of 620 or above is ideal for the refinancing process.
Step 2: Gather Financial Documents
The second step to refinancing a mortgage in the US is to gather all the documents that will be required by the lenders in order to assess your financial conditions. The documents that you must have for the process include the recent pay tabs, tax returns of the last two years, bank statements, details of the existing mortgage, and proof of the assets.
Step 3: Shop Around for Rates
As mentioned above, you must research the current market conditions before deciding on refinancing your mortgage. When the market is in a dip and the interest rates are actually lower than your original rates is the only time refinancing may actually be feasible. You may also shop around and take quotations from various lenders and crack a deal with the one that suits your financial conditions the best.
Step 4: Apply for Refinancing
After selecting which lender will suit your financial needs the best, you may then file an application form to kickstart the process of refinancing and provide all the necessary details accurately. The lenders may conduct a credit check or appraisals in order to assess the real current value of your asset.
Step 5: Review the Loan Estimates
The next step to refinancing a mortgage in the US would be thoroughly reviewing the loan estimates provided by the lender. This will help you be aware of what exactly you will have to pay and all the related details like the interest rates, the closing fee, the monthly payment, and the payment penalties that may affect you in the future,
Step 6: Close the Loan
Closing the loan refers to the finalization of the refinancing process and the transfer of the loan from your previous lender to the new lender. You must review all the documents related to the closing thoroughly and sign the paperwork necessary. The closing cost must also be paid before the copies of the closing records are received. Once your previous loan is closed, you may start making payments for the new refinanced loan.
Conclusion
In case you have any confusion about how refinancing a mortgage in the US works, you may consult a financial advisor who would be able to guide you the best through the refinancing process. An official advisor knows all the ins and outs of the finance industry and he may also help you find the best deal with the lowest interest rates to refinance your existing mortgage.
