Refinancing FAQs
Your Guide to Common Home Refinance Questions and Answers
Refinancing replaces your current mortgage with a new loan, typically to obtain better terms. It’s often used to reduce interest rates and save money over the life of the loan.
Common reasons for refinancing include:
- Lowering monthly payments through better interest rates.
- Changing the term of the loan, such as shortening the loan duration.
- Consolidating debt into one loan with a lower interest rate.
- Converting an ARM to a fixed-rate mortgage for stability.
- Accessing home equity through a cash-out refinance to pay for expenses like home repairs.
Refinancing follows a similar process to your initial mortgage application. Lenders will review your income, credit score, and home value. You'll then choose a loan product that aligns with your goals.
Various refinancing options are available, including:
- Conventional home loans
- FHA Streamline Refinance
- FHA 203(k) Refinance
- And more
Refinancing can offer several benefits, depending on your situation:
- Lower monthly payments could help ease your financial situation, but be mindful of the total cost over time.
- Shortening your loan term can save money on interest if your financial situation improves.
- Accessing home equity can provide funds for significant expenses, like home repairs.
- W-2s for the past two years
- If you own rental units, rental agreements and tax returns for the past two years
- Your last 2 bank statements, and your most recent statements for retirement accounts, mutual funds or stock accounts
- Settlement agreements or divorce decrees if applicable
- Green Cards, L-1/H-1 visas for non-citizens
- Recent pay stubs and proof of other income
- Your current mortgage note
- Other documentation may be requested.
- Proof of income - provide copies of your pay stubs
- Tax information - provide copies of tax returns for the past two years
- Credit Reports - a credit check will be performed
- Debts - provide documentation of your outstanding balances, such as car loans
Points are upfront interest payments made to lower your mortgage interest rate. One point equals 1% of your loan amount. Paying points reduces your monthly payments but involves an initial cost. Whether paying points is right for you depends on factors such as how long you plan to stay in the home and how much you can afford upfront. Typically, people with long-term mortgages may choose to pay points to lower payments, while those planning to sell within 5-7 years may opt out of paying points.
Your FICO score indicates your creditworthiness, helping lenders assess your likelihood of repaying a loan. It factors in:
- Payment history
- Employment history
- Length of credit history
- Credit utilization
- Derogatory items (e.g., collections, bankruptcies)
Improving your credit score requires time and discipline. Some ways to raise your score include:
- Paying bills on time
- Reducing credit balances
- Avoiding excessive credit inquiries
- Establishing a credit history if you lack one
If there’s an error on your credit report, report it to the credit agency and the creditor involved. You can also work with a credit repair specialist to ensure the error is corrected.
Your credit report contains:
- Identifying information (Name, Social Security, Phone number, Address)
- Debts and accounts
- Collections, bankruptcies, and suits
- Inquiries made in the last two years
Mortgage rates are affected by economic conditions such as inflation, growth, the Federal Reserve's policy, and the state of the bond and housing markets. Additionally, your financial health plays a significant role in determining the rate you receive.
- Prequalification provides an estimate of what you might be able to borrow based on an informal assessment. It does not guarantee approval.
- Preapproval is a more thorough process involving the submission of documents, such as income and credit history, and gives you a stronger position when making offers on homes.
A rate lock guarantees a specific interest rate for a set period, protecting you from rate increases before closing. However, if rates drop, you may miss out on the lower rate.
Yes, lenders often sell mortgages to other investors. If this happens, the terms of your loan stay the same, but you will make payments to the new lender.
Even if your lender goes out of business, your loan remains in effect, and payments will be transferred to another lender. Your loan's terms remain unchanged.
PMI protects the lender in case you default on a loan, typically required when your down payment is less than 20%. The higher your down payment, the lower your PMI cost will be.
Consult your loan officer before making any large purchases during the loan process. Significant changes to your debt-to-income ratio can negatively impact your loan approval.
If you anticipate changing jobs during the loan process, inform your loan officer. Lenders prefer applicants with stable, verifiable employment history, typically two years or more.
A home inspection is crucial to understanding the condition of a property before buying. It can also help in negotiations for a lower price or repairs before purchase.