A refinance can help change the terms of your loan and make your mortgage easier to manage. Let’s take a look at the refinancing process and the costs it represents. We will help you understand how refinancing works and how you can start it with Rocket Mortgage®.
Overview: what is refinancing?
When you refinance your mortgage, a new loan replaces your current loan. Depending on how you refinance, your new loan may have a different term, interest rate, or principal balance.
You are not required to refinance with your current lender. If you choose another lender, it will pay off your current loan, and your relationship with your previous lender will end.
There are two main types of refinancing you can choose from: term and rate refinancing or cash-out refinancing.
Refinancing of terms and rates
With a refinancing of terms and rates, you will change your interest rate or the term you have to pay back your loan money. You can lower your monthly payments by increasing the term of your loan, or you can save money on interest over time by making a higher monthly payment.
You can also qualify for a lower interest rate. Refinancing the term or rate of your loan does not change the principal amount or the original amount of money that you were loaned.
Refinancing with cash outlay
A cash-out refinance occurs when you take the equity in your home. The principal is the amount of money that you deposited for your house through a down payment or monthly payments. A cash out-of-pocket refinance lets you withdraw money from your principal for a variety of purposes, whether it’s to pay off credit card bills, make home improvements, increase retirement savings, or open a college fund. your son. When you refinance with cash outlay, the interest rate and term may or may not change.
A cash-out refinance increases your mortgage principal balance. You agree to take a more expensive loan in exchange for cash. For example, suppose you have $ 80,000 remaining on your loan, but you need $ 10,000 to make kitchen improvements.
A cash-out refinance means that you would agree to borrow $ 90,000, and your lender would give you $ 10,000 in cash. You must have some equity in your home to qualify for a cash-out refinance.
Keep in mind that not everyone is eligible for a refinance. You must meet the individual terms of your lender to obtain it. Here are some things to consider before you start looking for a lender:
Capital of your current home: Don’t assume you’ll be able to get $ 10,000 through a cash-out refinance if you’ve paid $ 10,000 off your mortgage.
Lenders require that the equity in your home be greater than what you want to take out. The amount of equity you need to have to qualify for a refinance varies by lender and loan program.
Credit score: Lenders check your credit score when they look at your refinance application, just like when you apply for a mortgage. You will need a credit score of at least 620 (580 if you have an FHA loan) to qualify for a refinance.
Other debts: Your mortgage lender also reviews your current debt-to-income ratio when considering you for a refinance. The lower your debts are at the time of application, the greater your chances of being approved.
Reasons to refinance your mortgage
There are many reasons why you might want to refinance your mortgage. Let’s analyze a few.
Modify your monthly payments
You can reduce your monthly payments if you refinance your loan with a longer term. For example, if you refinance a 15-year mortgage with a 30-year loan, you have more time to pay back what you owe. This means that your monthly premium will be lower.
Extending the term can help you normalize your situation if you have trouble keeping up with your monthly payments. Just keep in mind that when you extend the term, you pay more interest over time.
You can also do the opposite and shorten the deadline. When you refinance to reduce the term, you save money in interest and you can have your house debt free in less time.
However, this will also increase the amount you will have to pay each month, because you will have less time to pay off the loan. Refinancing for a shorter term is a great option if your income is higher than it was when you got the mortgage.
Lower the interest rate
You may be eligible for a lower interest rate if you have a higher credit score or your debt is lower than when you first got your mortgage. You can also qualify for a lower interest rate if market rates have dropped since you signed the loan.
Lowering the interest rate reduces the amount you owe each month, and you can even save thousands of dollars over time. Compare your current annual effective rate (APR) to competitive lenders’ offers to see if you can save money with a refinance.
Disburse cash capital
Selling your home isn’t the only way you can use your equity to get cash. A cash-out refinance allows you to take advantage of the equity you have accumulated in your home in exchange for a higher mortgage principal.
You can use the money you pay out of your capital for different purposes. You can opt for a cash-out refinance to consolidate debt, pay home repair bills, or fund retirement accounts.
You must have a certain amount of equity in your home to qualify for a cash outlay refinance. Depending on the type of loan, your lender may also require you to leave a percentage of equity in your home.
How does refinancing work?
Now that you understand the potential benefits of refinancing your loan, let’s see how the process works in practice.
Find a lender to help you with refinancing
First, you must choose a lender. Refinancing your loan is an important decision, so make sure you choose one that is reliable and affordable. Don’t be afraid to compare current rates, availability, and customer satisfaction ratings for each lender.
Prepare the necessary documentation
Your lender needs some documents to process your application. Having your documents ready beforehand can speed up the process. Some of the documents your lender may need are:
- Your last two pay stubs
- Your last two W-2 forms
- Your last two bank statements
If you are married, your lender will also need documentation from your spouse. They may ask you for more income documentation if you are self-employed.
Apply through your lender
You can request a refinance through your lender once you have your documentation ready. The specific process that you will go through will depend on your particular lender.
Regardless of the lender you choose, once you have been approved you will receive a document called a “Loan Estimate”. Your Loan Estimate tells you the new terms of your loan, your APR, and an estimate of how much you will have to pay at closing. Your lender may allow you to “freeze” the interest rate while it completes the risk assessment and closing processes.
The underwriting stage is when your lender looks at all of your documentation to make sure you qualify for a refinance. During this stage, your lender reviews and verifies the documentation you submitted when you applied.
Your lender takes care of the risk assessment for you; all you have to do is wait. Most refinance risk assessments take 1-2 weeks, but any third party involved in the process (such as appraisers) can delay this. He passed.
Just like when you bought your home, an appraisal must be done before refinancing. Your lender requests the appraisal, the appraiser visits your property, and you receive the estimated value of your home.
If the value of the house is equal to or greater than the amount you want to refinance, it means that the risk assessment is complete. Your lender will contact you with information about the closing.
What happens if the calculation result is lower? You can choose to reduce the amount of money you want to get by refinancing or you can cancel the application.
Closing your refinance is very similar to closing your initial mortgage. Since you already own the property, you don’t need to worry about sellers or real estate agents. At closing, you can ask last minute questions about your loan, pay closing costs (or include them in your loan if you have enough equity), and sign the new loan.
You will not receive cash at the precise time of closing if it is a cash out-of-pocket refinance. The Truth in Lending Act requires your lender to give you 3 business days after closing to cancel the refinance. After that time, your lender will transfer the funds to your account.
Benefits of a refinance with Rocket Mortgage®
Thinking of refinancing? Here are some great reasons to choose Rocket Mortgage® for your refinancing.
- Rocket Mortgage®It is accessible: You can use Rocket Mortgage® in all 50 states, and our renowned customer service team is available 24 hours a day, 7 days a week.
- Rocket Mortgage®It is safe: Rocket Mortgage® uses bank-grade encryption to protect your data, and we will never sell your personal information.
- Rocket Mortgage®it is precise: When you apply for a loan at Rocket Mortgage®, you receive real figures, not approximate. Thanks to this, buying a house for a value that is within your budget can be much easier.
A refinance replaces your existing mortgage with a new loan, and can allow you to change the term or interest rate on your mortgage or pay the equity in your home. Obtaining a refinance is a lot like applying for a mortgage. First, you choose a lender and submit the application with the necessary documents. Your lender will assess the risk of your loan and request an appraisal. If everything is in order, your lender will schedule the closing of your loan. You will receive your money between 3 and 5 days after closing if you will withdraw money from the accumulated capital of your home.
Consider Rocket Mortgage® if you have decided that you need a refinancing: it is an accessible, safe and precise way to obtain it.