Most people often wonder how does refinancing a home work. Understanding the process is critical to identifying the best available options for refinancing that can help you save money. Despite the simplicity of the process, it must, however, make financial sense whether the refinancing is aimed at reducing your monthly mortgage rate, extending the life of your mortgage loan, remodeling or renovating your home, getting some cash out, etc.
How Does Refinancing a Home Work?
1. Examine Different Loans Programs And Their Benefits
Understanding how does refinancing a home work involves examining the different loans programs available and their benefits. Presently, the most common refinancing loans programs include cash-out mortgages, cash-in mortgages, and rate and term mortgages. Each has its terms and benefits when used appropriately.
- Cash-Out mortgages involve securing additional financing on top of the current existing loan based on the equity in the home. This option is ideal when seeking to consolidate high-interest debts and for home renovation.
- Cash-in mortgages are the direct opposite of cash-Out loans whereby at closing, you pay money instead of getting money. This option is not so popular and is often used when individuals have extra cash and want to lower their monthly payments or when opting out of paying private mortgage insurance (PMI).
- Rate and term mortgages refinancing is when you secure a new loan for the exact amount owed on your current loan. This option is popularly used when the rate of interest on the new loans is much lower than the current rate. Other individuals use this option to convert their existing mortgage to a new one with a shorter term.
2. Make The Application
The very first step in making the application includes consulting with your mortgage expert to help you figure out whether refinancing is appropriate based on the expected savings and decreased monthly payment. The mortgage consultant also provides information regarding the possible closing costs you are expected to incur for the new loan. Once you examine the expected financial benefits of refinancing and are convinced that the savings on the new loan outweigh the costs of refinancing, you can proceed with the application. The mortgage consultant shall then guide you through the paperwork including locking in your rate and terms. Engaging with a mortgage expert will take you through the different processes of how does refinancing a home work.
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3. Submit The Necessary Documents
The refinancing process involves the review of various documentation. Your consultant will have to review your loan repayment history, credit score, and various other supporting documents. The consultant may also ask a few questions before preparing your file for underwriting. Some essential materials that you must present along with your application include W-2 income statements, asset documentation, income statements, and tax filings. Once you avail all the required documents, the mortgage consultant will notify you and submit them for review.
4. Appraisal And Approval Decision
Once you have provided the necessary documentation and agreed with your mortgage consultant, the next thing is to appraise the value of your home to establish its equity. The process entails evaluating the value of your home in comparison to those within the neighborhood. Depending on the home equity, your mortgage consultant will then determine the terms of the loan.
The underwriting process takes between two to three weeks during which the materials you submitted are analyzed before the final approval. Once the lender approves the loan, you receive a detailed loan packet, which includes the terms of the contract, information about monthly payments and the rate of interest, and your closing settlement statement.
The appraisal and approval decision processes cover most of the information regarding how does refinancing a home work; therefore, you should pay close attention to the processes involved here.
5. Closing The Deed
The closing process sums up the last step to in understanding how does refinancing a home work. This stage involves meeting with a lawyer and the mortgage consultant to complete the deed filings with the relevant authorities. During the closing process, you are required to pay some government fees for the new mortgage deed, and any other fees owed to the consultant, broker, or any third party involved. Lastly, after signing the deed, a loan settlement date is issued, which the new loan pays off the previous mortgage. In some cases when dealing with a new lender, the new lender will have to send a wire transfer to your existing lender to pay off the mortgage.