Depending on current market conditions, refinancing your mortgage is often a smart move for homeowners who are seeking lower monthly payments, consolidation of debt, cash for home enhancements, or for a number of other reasons. If you’re considering a refinance, your first step should be a loan consultation with your local mortgage banker, as they can help you assess how your loan compares to the current market. After you make that first step, however, here are three ways you can avoid common pitfalls to counter any issues before and during the refinancing process.
Before getting too far along into the refinance process with your lender, you should try to get a good idea of the value of your home. It is important to have an understanding of this value because it can affect your loan approval. Looking at sale prices of nearby listings of similar types of homes can be a good starting point in this process. A few online research tools for finding nearby sale prices can be found at Zillow.com and Realtor.com (try Realtor.com/homevalues). Once you get further along in the refinance process, an appraisal—which is ultimately the most reputable valuation of your home—will be performed. As a best practice, you should select the lender you’d like to perform your refinance first, and they will then select the appraiser.
When going through a refinance, you still have to pay closing costs, and sometimes those costs can outweigh the immediate savings from doing a refinance. Closing costs often amount to 1.5 - 3 percent of the loan amount, but it always best to consult with a Mortgage Banker for specific terms. Borrowers should compare their projected closing costs to the amount of money they will save each month with their Mortgage Banker to find the break-even point. Your break-even point is the point at which your monthly mortgage payment savings covers the costs of closing your new-and-improved loan, and you begin accumulating more savings.
As you can probably imagine, when borrowing a large sum of money, financial documentation is required to show that you have the ability to pay it back. We understand the mortgage process can feel invasive, so we offer the guidance and resources our borrowers need to ensure a smooth and organized closing. To ensure a smooth loan process, start to get the necessary paperwork prepared ahead of time with our documentation checklists—these are a great starting point. However, there may be a time when your mortgage banker, processor, and underwriter each require additional documentation from you. It is important to be diligent with these requests to ensure the loan process goes smoothly.
Steer clear of these hurdles by getting the guidance you need from a local and experienced lender. You can learn more about refinancing basics on our web page, and then decide whether a refinance to a fixed or adjustable-rate loan suits your situation with our downloadable, Fixed-Rate or Adjustable? 5 Questions to Help You Decide.