Refinance: Why You Should and How to Do It
Your complete guide on why you should refinance and how to do so.
If you’re a homeowner, you might be hearing everyone, from your neighbors to news anchors, talking about refinancing. So, should you be considering it too? There are many situations in which refinancing your mortgage may be right for you, so consider some of the reasons to refinance and how to prepare to refinance your home.
First off, what is refinancing? When you refinance your mortgage, you’re basically trading in your old loan for a new one and there are one of two main ways to do this. There’s a rate-and-term refinance, where you take the remaining balance on your current mortgage and transform it into a new loan with a better rate or term for your situation. Then there’s a cash-out refinance, where you liquidate some of your home’s equity to create a new loan of the previous mortgage and the cash you took out. Neither one is better or worse than the other, it just depends on your situation and needs for the refinance. Galaxy Lending Group can help you decide which one is best for your personal needs.
Why Should You Refinance?
Lower Monthly Payments
Mortgage rates are at an all-time low, meaning you probably got your original mortgage at a higher rate. Refinancing your mortgage can allow you to get a new loan with a lower rate, reducing the amount of interest you pay and lowering the monthly payments to allow you to overall pay less over the life of your loan.
Need Cash Now
This is where the cash-out refinance option comes in. You can use the equity that you’ve built in your home to borrow money at a lower cost. This is a common choice for those who want to reinvest that cash back into their homes for remodels and improvements. It can also be used for unexpected expenses, such as medical bills or education costs. This can be a better option than just taking out a normal loan because mortgages often have much lower interest rates since they’re viewed as less-risky investments.
Restructure the Loan
The economy is probably different now than when you originally took out your mortgage, so restructuring may help you save money. If you had an adjustable-rate loan but you’ve decided you’ll be staying in your house for the long haul, then converting your mortgage to a fixed-rate loan will allow you to have a lower rate and in turn, lower monthly payments and interest.
Additionally, if you weren’t able to put a large enough down payment on your house, you probably had to take out mortgage insurance. This is to mitigate risk on your loan for your lender in case you fall behind on your payments and default. Once you own 20% of the home’s value, you can get rid of mortgage insurance and restructure your loan without it. This can eliminate unnecessary payments and lower the overall monthly amount you spend.
If you have high-interest loans like credit card debt, student loans or a second mortgage, you may be able to consolidate them all into one monthly payment. This is technically considered a cash-out refinance, so the process works in a similar way. A portion of your home equity is turned into cash that you can use to pay off other loans and debts. Then your old mortgage will be replaced by a new one including the amount that you took out to pay those other debts, often at a lower rate. Mortgage interest is also tax-deductible, unlike credit card interest, offering you another opportunity to save money.
How to Prepare
Decide Your Goal
Once you’ve decided that you want to refinance, you’ll want to speak with a mortgage lender to see which option is right for you. You’ll need to consider the rate, the type, the term and whether you want to take credits or pay points to influence the amount you pay. If your goal is to pay off your home quicker, you can take out a loan with a shorter term which will mean higher monthly payments, but less money paid over the life of the loan. If your goal is a lower monthly payment, make sure you’re checking out the rates and fees carefully to ensure you’re actually getting a good deal. Use Galaxy’s Loan Calculator to get an estimate on your rate in just a few minutes.
Clean Up Your Debt
Whether or not you get the best rate depends largely on your financial situation. With a higher credit score, you’ll qualify for lower rates to refinance into. You may also want to streamline your finances beforehand to reduce the chance of any delays. This means unfreezing credit, paying outstanding tax liens and determining if you want to include a second mortgage in your refinance.
Refinancing your home usually requires similar paperwork as when you got your original mortgage loan. Collect two years of personal tax returns, two years of business tax returns (if you own more than 25% of a business), two years of W-2s or 1099s, two months of bank statements and proof of any alimony payments. This will help the process to go as smoothly as possible.
Prepare For the Appraisal
Just like when you first purchased your home, you’ll be asked to provide a home appraisal to determine your home’s market value. This will tell your lender how much equity you have in your home relative to its value. The more equity you have, the better a rate you can get. The most important way to prepare your home for an appraisal is to ensure that your home meets regulations for health and safety measures, like smoke/carbon dioxide detectors and permitted additions. Make any necessary repairs before appraisal do that you won’t need to have the appraiser re-inspect your property, delaying the process and potentially adding extra fees.
Refinancing can seem like a hassle, but if you’re proactive and prepare ahead of time, the journey can actually be simple and incredibly rewarding. Galaxy Lending Group will be there every step of the way, so apply online today.