When mortgage rates are low, homeowners may think they have missed the boat on locking in a lower rate than they have now. While they could continue to pay their mortgage with the same rate, they could lower their current interest rate by refinancing. Even if you did not think you would refinance after closing on your house and acquiring a home loan, refinancing is a good opportunity to potentially save money on interest payments and pay your loan off even faster, if you accelerate mortgage payments.
"An estimated 7.1 million borrowers may benefit from refinancing."
According to the Black Knight Financial Services Mortgage Monitor, an estimated 7.1 million borrowers may benefit from refinancing in as of February 2015. With historic low rates, homeowners can capitalize not only on smaller mortgage rates but also higher home equity. Before you decide to refinance, you should ready your finances and key documents.
Here are five ways to prepare for refinancing your mortgage:
1. Shop Around for Interest Rates
When interest rates are low, lenders expect to see higher refinancing applications for their mortgage products. To get the best deal on your mortgage refinance, ask two or three lenders about their mortgage options, branding tool AdviceIQ suggested. Do an online search for mortgage rates from various lenders locally and narrow down this list before applying for refinancing.
2. Know What Your Mortgage Refinancing Options Are
If you decide to refinance, you should know you have the option to switch to a different mortgage type if you know it would improve your situation financially. For example, you could choose to switch from an adjustable-rate mortgage to a fixed-rate mortgage, according to Bankrate. This results in the same payments throughout the life of the loan rather than having the interest rate change after a certain period of fixed payments.
3. Gather Documents You Will Need
Applying for mortgage refinancing is similar to when you applied for your home loan. According to MainStreet, some documents you will need for mortgage refinancing include bank statements, proof of income like recent paystubs and tax returns. You might also have to submit documents that show how much your home is worth. You can get this information by calling a local property tax office. After you apply for refinancing, lenders may require an appraiser visit your home to confirm your house is worth the purchase price on the record.
4. Look at Your Credit Score
If you are refinancing, you will likely go through the same application process as before to determine your new interest rate. This will include having the lender pull your credit report. There are some credit-related events that could have happened after you were approved for your last mortgage. You may have had late payments for other credit obligations or added new credit accounts. Depending on the impact of these events on your credit score, the lender may look favorably on your updated credit report and grant you a lower rate.
5. Assess Your Income and Employment Situation
Lenders often want to see you are financially stable and will likely review your sources of income that show you will be able to fulfill your credit obligations. This is no different when refinancing your mortgage and lenders will usually ask whether you have the same employer as when you first applied for a mortgage to evaluate your employment situation and decide whether you will have a steady income. If your employer or income has changed, use a mortgage repayment calculator to see whether you can afford the monthly payments for your new mortgage.