Interest rates are currently at a historic low, making it extremely tempting to reconsider your current mortgage. Indeed, you may be thinking about refinancing your mortgage in order to make the most of low rates. But is it the right time for you and do you have a lot to gain from making this move?
Read on to check out the 7 essential steps you should take in order to take advantage of low rates and refinance your mortgage.
Step 1: Determine Why You Should Refinance
As tempting as the current low rates are, it’s best to start off by asking yourself how refinancing your mortgage will benefit you. Are you trying to switch from an adjustable-rate to a fixed-rate mortgage? Perhaps you’re looking for a lower interest rate, or to turn your 30-year loan into a 15-year one. Or maybe you need to tap into your existing home equity to cover your financial needs. The reason why you’re refinancing is just as important as taking advantage of the lower rates, so weigh out its potential impact in the long run.
Step 2: Check Your Finances
When you’re refinancing your mortgage, it’s not just the closing costs you should consider. Check how much equity you have built in your home, your credit score, as well as your debt-to-income ratio. If you’re considering changing the terms of your mortgage, bear in mind that refinancing to a lower interest rate does not, by default, result in savings. Depending on interest rates, you may also be faced with longer break-even periods as you recover the closing costs on your new loan.
Step 3: Avoid Applying for New Credit
If you’ve already decided to refinance your mortgage, it’s best if you hold-off applying for other types of credit, even if it’s just a new credit card. Lenders can perform hard inquiries in order to approve a loan, which will deduct points from your credit score, and show up on your credit report. Also, temporarily refraining from getting new loans will also provide you with a stable financial situation until your mortgage refinancing is approved.
Step 4: Shop for the Lowest Rate
Even though interest rates are at a historic low, they won’t be the same across the board. Therefore, even if your current lender is offering a tempting rate, it’s best to peruse the market in search of more attractive offers. You can use online sources to compare lenders, or even consult with a mortgage broker if there are any gray areas that might need clarification.
Step 5: Have Your Paperwork Ready
In order to streamline the refinancing process, make sure that you have all your paperwork ready before applying. Compile a file with your ID, bank statements, current mortgage information, tax returns, proof of assets and income, credit score, and so on. Check the lender’s requirements when it comes to paperwork, to ensure that you’re all set.
Step 6: Submit Your Applications Strategically
Once you’ve built a selection of lenders offering the best rates and fees, you don’t have to settle for a single one. Applying for a mortgage refinance with several lenders will provide you with more offers to choose from, as well as speed up the process by ensuring that you don’t have to wait for each lender to reply one at a time. However, it’s best not to send out too many applications due to the fact that, as mentioned above, hard inquiries will negatively impact your credit score. At the same time, sending out too few applications could result in missing out on deals, so finding the balance is essential.
Step 7: Be Patient
The refinancing process can take time, especially in the current climate, where some banks might not be open, and where face-to-face meetings with lenders are best avoided. Submitting the applications is the easy part. Once you hear back from the lenders, you will need to decide on the one you wish to work with, as well as choose your refinancing terms. Depending on the lender, your home may also need to undergo an appraisal, which needs to be scheduled early on, while your rate is still locked in. After that, you will need to close on your refinanced mortgage.
With enough planning and correct timing, refinancing your mortgage can work to your advantage, and it’s a great way to capitalize on the low rates that lenders are currently offering.