Home Refinancing Steps

Home Refinancing Steps - The process of refinancing your home is very similar to the steps you took when you first purchased it-without the hassle of house hunting and the stress of moving.

Below, we'll step through a basic overview.

To streamline the refinance process, here are a few steps to complete before contacting a lender:

1. Define your goal. What do you hope to accomplish with your home refinance? Are you looking to reduce your monthly payment, shorten the length of your loan, change from an adjustable to a fixed-rate loan, borrow against the available equity, or combine a first and second mortgage? After pinpointing your goal, evaluate whether a refinance will improve your financial situation.

2. Determine the value of your home. In today's market, the value of your home plays an important role in determining the feasibility of a home refinance. While 20% equity is the standard for most lenders, don't assume that a refinance is out of the question if you don't meet this criterion. To approximate your home's value, contact a local appraiser and ask about sales of comparable homes in your area, or visit online appraisal websites like www.zillow.com.

3. Check your credit. While the lender will check your credit score, it's a good idea to review the information on your own beforehand. You can obtain a free credit report from an online credit service and then review the information for accuracy. If there are inaccuracies or surprises, be prepared to offer explanations to your lender.

4. Evaluate your current debt and income. Make a list of all monthly debt payments, including mortgage, auto loans, student loans, and credit cards. Then, make a separate list of all sources and amounts of monthly income. While the standard qualifications for a home refinance call for no more than 36% of your income going towards debt, being outside of this boundary will not necessarily disqualify you.

5. Gather paperwork and documents. While you may not need all of these documents, it's helpful to have everything on hand before you contact lenders:

  • W2s and tax returns for the past 2 years

  • Current month's mortgage statement

  • Pay stubs for the past month

  • Home insurance declaration page and policy number

  • Bank statements for the last 2 months for each active account

  • Retirement statements

  • Clear copy of driver's license and social security card

6. Contact lenders. Now that you've got your paperwork and figures in order, it's time to contact lenders regarding interest rates and fees. While it's best to call your current lender first, be sure to conduct a thorough search before making your choice.

Now that you're working with a lender, here's what to expect:

7. Pre-qualify. During the pre-qualification stage, the lender will ask for information to determine your refinance eligibility. Be prepared to share your debt and income information, an estimate of your home's value and, for the purpose of a credit check, your social security number.

8. The call back. After the initial information is reviewed, the lender will contact you regarding the terms of the loan(s) you qualify for. For example, based on the pre-qualification discovery stage, the lender may determine that your income isn't sufficient to refinance a 30-year mortgage into a 15-year, but you may qualify for a 20-year loan.

9. The application. During the application process, the loan officer will discuss options and fees associated with your loan. At this point, the mortgage company will be able to lock in your interest rate.

10. The appraisal. Most lending institutions will require a new appraisal. Typically, the fee of $350-$400 is paid directly to the appraiser.

11. The approval. If your home appraisal is within the parameters of the loan, the loan officer will grant final approval. At this time, you will receive a set of loan documents to review.

12. Signing and settlement. After all paperwork is processed, a settlement date will be scheduled. At this time, you will sign all of your paperwork, and your old mortgage will be paid in full. After settlement, you will not have to make a mortgage payment to your new lender until the second month.

While refinancing a mortgage may seem like a daunting task, the process will go much more smoothly once you have a solid understanding of the steps involved. With a little preparation and research, you can be well on your way to achieving greater financial stability.

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