First, you’ll need to decide if refinancing makes sense for you in the short-term and long-term. Remember, refinancing doesn’t eliminate your debt, but it can lower your monthly payments, give you cash from your home’s equity, reduce the term of your loan, or change the type of mortgage you have.
Debt consolidation is another goal of refinancing. If you have a first mortgage and a home equity loan, combining your debt into one mortgage can level out your payment, and sometimes even lower it.
Term reduction is another goal of refinancing. If you have 20 years left on your mortgage, you could refinance to a 15 year mortgage and own your home five years sooner.
Changing your loan type is another goal of refinancing. If you have an FHA mortgage with mortgage insurance that is locked in for the life of the loan, you can refinance into a conventional mortgage and drop the mortgage insurance once the appropriate loan to value level is achieved.
An important first step in the refinancing process is to determine your equity. That is the difference between your mortgage balance and your home's appraised value. If you owe less than your homes appraised value, you have equity you can put to use. Lenders use a loan-to-value ratio (LTV) to determine the amount you are eligible to borrow (mortgage balance/appraised value = LTV). You’ll also have to factor in your debt-to-income ratio (DTI), which is the percentage of monthly income you put aside for bills. The lower the DTI, the better your chances are of obtaining the loan.
Step 2: Know the Terms
How much you pay on your refinance is determined by several factors. Getting to know these terms will help you understand the process. Interest Rate: The percentage you pay for the use of money you borrow. Interest rates are based on several things including market conditions, your credit score, down payment and type of mortgage, just to name a few. Discount Points: One point equals 1% of your mortgage amount. You may be able to pay points up front to lower your interest rate. Plus, points can be tax-deductible. Consult your tax advisor. Origination Fee: A fee charged by the lender for making a real estate loan. This is typically a percentage of the loan amount. You may be able to finance the origination fee as part of your loan amount. Loan Term: The length of time you have to pay off the loan.
Step 3: Choose a Lender
Now that you’ve decided refinancing is right for you, it’s time to choose a lender. Do your homework and consider not only the fees, but their level of service and your potential long-term relationship.
When planning a refinance, it’s important to know the team you’re working with. At Fifth Third, our Mortgage Loan Specialist will partner with you, answer all of your questions, and guide you through every step of the process. Our only goal is getting you a loan that will meet your needs.
When you find the lender and rate you want, lock it in. Then you’re guaranteed that rate at closing, no matter what happens in the market.
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