How to Refinance a Home

We strive to live the American dream of home ownership. Our goals are simple: a few bedrooms, a place to put down roots and watch our capital blossom. People tell us to stretch to get into the house we can afford. We look for what appears to be the cheapest mortgage and select a few paint colors. It’s only a few years later that we find that things are a little tighter than expected, requiring some hefty home improvement and hanging over us with some nagging credit card debt. Our mortgage no longer suits us and we need information on how to refinance a home.

Things to collect: Regardless of your situation, you need the following information before contacting a lender:
1. Copy of current loan slip (usually a document titled “Promissory Note”)
2. Latest mortgage loan statement showing the balance of the loan
3. Dollar amount of homeowners insurance and annual property taxes (for escrow calculations) – You can call your city treasurer for tax information.
4. Payslips (for monthly gross and net income)
5. List of all other loans and their minimum payments
6. An idea of ​​your creditworthiness (You can order a free report online.)

Understand what you can afford: If you are planning to refinance a home loan, you are either:
• Verification to ensure you are getting the best deal;
• You are in a tight spot because of a job loss, reduced income, an adjustable rate loan, or overwhelmed with debt;
• Worried about the future and want to shore up your finances before you get stuck in a difficult position with fewer options.

All three of these situations required you to fill out a budget to determine exactly what you can afford. Mortgage lenders generously allow borrowers to take loan payments of up to 28% of their gross monthly income, but that can be far too much for many people. A budget is simply a monthly take-home minus each individual expense.

Make sure you include everything: Credit, Utilities, Tuition, Food, Dining Out, Kids Lunches, Vending Machines, Entertainment, Gifts, Subscriptions, Medical Excess. Also make sure that 10-20% can be set aside for savings. What’s left is what you can afford for your mortgage payments (including taxes and insurance trustee). Don’t let any lender convince you that you can afford more.

Choose a lender you’re comfortable with: If you have problems due to a “hard” situation, e.g. B. job loss, medical expenses, then contact your current lender first. There is a federal program called The Making Home Affordable Program that can help lenders work better with their customers in these situations to refinance a home.

If you just want a better price, shop around. Banks and credit unions tend to be very straight forward and use traditional paperwork when refinancing a home loan. Most will want a loan to value (LTV) of 80% or better. You can visit sites like to get an idea of ​​what similar homes are aiming for in your area. If you have an LTV of at least 93.5%, you need an FHA loan. Mortgage brokers have a variety of loan packages that you may be able to consider. The main difference is that with a broker, all loans are sold to a service provider, so you are definitely dealing with a different company afterwards

If you plan to stay in your home for at least 5 years, you should consider “buying” your rate by paying points. Each dot represents 1% of your mortgage amount, which you pay at closing to lower your interest rate. Fixed prices are much easier to budget for. Adjustable Interest Rates (ARMs) will introduce uncertainty about future changes in your payment amount. If you choose an ARM, make sure you understand exactly how high rates can go, when they can change, and what that can mean for your payments.

Make sure you understand every single term of your loan agreement(s) and any fees that you are required to pay. Never be afraid or ashamed to ask questions, and never settle for an answer you do not fully understand. A final note of caution: once you have agreed to fill out a loan application, the lender will collect your credit report. This credit report will help determine the interest rate you qualify for.

Too many requests for your credit report can negatively impact your score, so narrow down the lenders you’re comfortable with and have most of your questions answered before agreeing to fill out a home refinance application .