Refinancing your home mortgage takes place over 4 stages.
1) Identifying your loan’s objectives
Review the long-term objectives and purpose of refinancing your mortgage to discover secondary goals, if any. Some of your goals may include:
- Accelerating the payoff (shorter loan terms mean lesser monthly payments and faster payoff),
- Lowering the interest rate (refinancing when the interest rates are low can reduce the monthly payments and the total borrowing costs).
By having clear objectives, you can calculate an estimated cost and choose the best option.
2) Confirm the timing and gather everything you need
Some factors which play a role in determining when to refinance your mortgage include:
- Debt-to-income ratio (mortgage lenders prefer low debt-to-income ratios, so if yours is high, consider lowering the debt and begin the refinancing process after 6-12 months),
- Credit score (the borrower’s credit score plays a role in setting the interest rates).
The documentation you would require may include:
- Proof of income (recent tax returns, bank statements, or pay stubs),
- Property insurance information (your homeowner’s insurance policy helps in bundling your escrow payment),
- A recent home appraisal (the lender will order for a review of your home’s market value before closing).
3) Calculate your estimated refinancing costs
Calculate your approximate refinancing costs using a free mortgage refinance calculator. You should at least break even on the loan (the cumulative interest you pay should match the loan’s closing costs). A good refinance calculator can give you the breakeven point, or you can divide the refinancing loan’s closing costs by the monthly savings in relation to the original loan, and round up to the nearest whole number.
4) Look for deals, apply, and close
The next steps to follow (in the same order) are:
- Get multiple quotes using a quote finder (you’ll have to provide details like property type and purpose),
- Contact lenders and banks you have worked with before (you may get special prices for being a longtime customer),
- Apply for several loans within 2 weeks (you can only know the final costs after applying, and should definitely consider multiple offers before finalizing one),
- Evaluate every offer based on your goal (to reduce the monthly payment, check a loan with the lowest monthly cost),
- Choose the offer best suited to your objectives, and consider locking your rate for a predetermined period to reduce the interest rate,
- Close the deal.