Thinking About Refinancing? Here’s How It Works
Real estate is a fantastic investment, and it’s tough to make a deal sweeter than your own home. Pride of ownership empowers homeowners to take meticulous care of every detail of their property. As a result, they can build equity at accelerated rates as they enjoy all the rewards of the roaring real estate market. If you feel like you can’t tap into all that equity or those increasing property values unless you sell your home, think again. By refinancing a house, you could cash out some of your equity for other projects and investments, or you could use it to lower your payment, shorten your term, and pay your home off faster. So, what is the process of refinancing a house? Let’s explore.
Definition of Refinancing
Before we can answer what is the process of refinancing a house, we first need to get on the same page about its definition. Refinancing is a process by which a homeowner takes out a new mortgage on their home. This mortgage will simultaneously pay off your existing mortgage while granting new terms, which may include a new length, lower payment, or lower interest rate.
If your goal when refinancing your house is to tap into your existing equity, you’ll want to consider a “cash-out refinance.” This type of refinancing means replacing your current mortgage with a larger one (increasing your principal balance), so you can pay off your existing mortgage and get some cash in the process.
Regardless of why you want to refinance, here’s an explanation for all those asking: What is the process of refinancing a house?
How to Refinance a House
Refinancing can be an excellent way to support your financial goals, as long as you know your options and have a plan in place.
1. Determine If It’s The Right Time to Refinance
Generally, before you ask yourself what is the process of refinancing a house, you’ll want to take a step back and fully evaluate your situation. So, let’s first ask: Should you refinance at all? In most cases, homeowners choose to refinance for a few reasons:
- You’d like to lower your monthly payment by extending your mortgage term.
- You’d like to shorten your mortgage term by increasing your monthly payment.
- Interest rates have dropped significantly since you signed your mortgage.
- Your credit has improved, thus qualifying you for a lower interest rate.
- You’d like to tap into equity by finding a cash-out refinance option.
All of these are valid reasons to refinance. However, if your goal is to shorten your mortgage term by increasing your monthly payment, that’s one scenario where you’re better off just paying extra towards the principal balance on your existing mortgage to accelerate its payoff—no need to refinance unless there’s a prepayment penalty or high interest rate on your current loan.
With that said, if you fit into one of these scenarios and you’ve determined that refinancing is the best way forward, here’s what to do next.
2. Review Your Equity and Credit Worthiness
Similar to when you originally applied for a mortgage at the time you purchased your home, you’ll need to sit down and spend some time evaluating the numbers. Applying for a refinance is similar to applying for a mortgage in that lenders want to ensure you can afford the monthly payment and that you’re reliable enough to pay on time.
Here are some aspects to check before moving forward:
- Evaluate the equity you currently have in your home. This is extra important if you plan to pursue a cash-out refinance. The equity is how much your house is worth versus how much you owe. For instance, if your home’s fair market value is about $540k and you owe $340k, you have equity of about $200k.
- Remember that your home’s value may have increased. Many homeowners don’t realize how much equity they have built up in their property, even if they only recently purchased it. Equity is based on market value, not how much you paid for your home. So, if prices have gone up in your area, so has your equity. Ask a real estate agent if you need help estimating your home’s worth.
- Check your credit report and score. Just as when you originally applied for your mortgage, lenders will give you a better interest rate if you have a good score and strong credit history. If you’ve paid your mortgage on time, have little outstanding debt, and haven’t been applying for a lot of credit over the past year, you’ll be in good shape.
- Get pre-qualified for a refinance. Before you let any lenders pull your credit, it’s a good idea to use pre-qualifications to see if you’re likely to get approved or not. Certain banks may send you pre-qualification offers, but you should go online and try to get a “no credit check” qualification. This prevents a new inquiry from hitting your report.
Now that you’re well on your way to understanding what is the process of refinancing a house, it’s time to put your knowledge into action, assuming you still think it’s the right way forward.
3. Find The Right Offer
When you’re ready to refinance, you’ll want to apply with a handful of lenders so you can compare their offers. Of course, that takes a lot of time to do on your own. Leveraging a resource like LemonBrew Lending will put top-tier licensed loan originators to work for you to find the best offers. As you review your offers, follow these tips:
- Compare interest rates: Based on your credit profile and the term of the loan you’re applying for, each lender will offer you a different interest rate. You can often negotiate a lower interest rate by choosing a shorter loan term, but that also means an increased monthly payment.
- Evaluate closing costs: Every refinance comes with closing costs, just like your original mortgage. Closing costs generally add up to 2% to 5% of the total loan amount. With a refinance, these costs are typically rolled into your new principal balance.
- Consider a down payment: By bringing cash to the table, you can lower your principal balance, saving you money in the long run and perhaps allowing you to negotiate a lower interest rate.
Comparing loan offers side-by-side will help you make a sound financial decision to support your goals. Additionally, while getting cash in hand might not be the first thing on your mind, cash-out refinancing is a great opportunity to leverage your equity and use that money to build more value in your home, invest in other goals, or pay off debt.
Once you’re ready to take the next step and start comparing offers, LemonBrew Lending can lead the way. With the lowest rates, quick closings, and the best offers found for you, LemonBrew Lending will save you time and help you get the best offer refinancing offer on your home—especially if you want to cash out some of your hard-earned equity. Get started today!