Refinancing might take some careful calculations and a bit of time, but it's often worth it.
Refinancing your home isn't as simple as a phone call or single trip to the bank, but it's not so difficult that you shouldn't consider it. If you've put some thought into a refinance and want to move forward, you have several weeks of activity ahead. Fortunately, the process is similar for everyone, so the surprises (which will come) should be few.
You'll go through a series of certain steps before it's over, each one dependent on the last. Here's what you can expect when you refinance your home:
Step #1: Fill Out an Application
All refinances begin with an application. It might be a formal document that you fill out in person at the lender's office, or your lender might take your application over the phone. These days, it's common to do an application over the phone or download the paperwork and send them back.
Your application asks questions about income, employment history, current debt, the estimated value of your home, home improvements and their value, plus personal information such as your Social Security number, phone number, address, marital status, and even your education level, according to Fannie Mae.
You might meet with the lender to give your documentation, or send it via fax or rarely by email.
Step #2: Give the Lender Necessary Documentation
All lenders need certain documentation before they can give you a cursory loan approval. This information backs up what's on your loan application. The most widely-requested documents include verification of your income (such as W2s or 1099s), bank statements and a minimum of tax returns from the past two years.
You'll probably also be asked for proof of employment, proof of other income, such as alimony, an employment history, and of course proof of identification. If you're self-employed, be prepared to give the lender business tax returns from at least 2 years and a current profit and loss statement. You'll also need to agree to a credit check, and give the lender vital information about the property in question, says Citibank.
Step #3: Receive Your Loan Estimate
A Loan Estimate, which was once called a Good Faith Estimate, gives you important information about the prospective refi before you commit. This document is required by law, and it and you should receive it within about 3 days after you submit your loan application.
The Loan Estimate isn't a promise. It's an estimation of your fees and other costs associated with the refi, should it go through without a hitch. This document also gives you an estimate of what your mortgage payment and interest rate should be once the loan is finalized.
If the lender's offer fits your needs, then you're on your way to a new mortgage.
Step #4: Consider the Lender's Offer
Waiting for the lender's offer can seem like an interminable time. But there's a lot going on during this stage. The lender takes your application plus all of the documentation that you provided, and loan officer begins the task of verification and getting approval on your refinance.
Expect there to be at least a few issues along the way. The lender might need a better quality image of your driver's license, or you might be asked for more of an employment history or to explain any negative marks on your credit report. There's a lot that can snag up a refinance at this stage. Just try to remember that it happens to everyone.
Step #5: Get a Home Appraisal
An appraisal is a formal inspection of your house that tells the lender exactly what you're refinancing. You had an appraisal when you bought the property, but a lot of things can and do change. Lender's can't rely on an older appraisal.
The appraiser will document the number of rooms in the house, the square footage, and list pros and cons that affect the home's value. He also compares the specs on your house to those of houses that have recently sold in your area. And at the end, the appraiser comes to what he believes is a fair value. This value is used by your lender when fine tuning the terms of your loan.
Step #6: Close on the Loan
Once you get to step 6, you've survived a lot of paperwork and phone calls. The closing is when it all becomes final. Once you get a finalized approval, you'll get a date and location for closing, where you'll pay your closing costs.
Closing costs are about 3 percent of the loan, and you should find an estimate of them on your loan estimate. Included are usually the appraisal costs, loan origination fees, title work, and others that might vary by lender.
A refinance isn't easy, but people do it every day. Not as many as perhaps a decade ago, but the market is starting to bounce back and lenders are approving more loans now than in the past 5 years.
If you're still not sure about whether refinance is right for you, think about learning your home's estimated value. That will help show whether you're in a range where your value is high enough to support a new loan. Get your free property valuation here.