We strive to live the American Dream of homeownership. Our goals are simple: A few bedrooms, someplace to lay down roots and watch our equity blossom. People tell us to stretch to get into the most house that we can afford. We look for what appears to be the cheapest mortgage and pick out some paint colors. It’s only a few years later that we realize that things are a little tighter than expected, some hefty home improvements are needed and we have some nagging credit card debt hanging over us. Our mortgage is no longer fitting us and we need the scoop on how to refinance a home.
Things to Gather: Regardless of your situation, you will need the following information before you make any contact with a lender:
1. Copy of current loan Note (Usually a document titled “Promissory Note”)
2. Most recent mortgage loan statement with 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. Pay stubs (for gross & net monthly income)
5. List of any other loans & their minimum payments
6. An idea of your credit score (You can order a free report online.)
Understand What You Can Afford: If you are planning to refinance a home loan, you are either:
• Checking to make sure you are getting the best deal around;
• Finding yourself in a tight position due to job loss, reduced income, an adjustable rate loan or are in over your head with debt;
• Have concerns about the future & want to shore up your finances before you are stuck in a difficult position with fewer options.
All three of these situations required that you must complete a budget to determine exactly what you can afford. Mortgage lenders will generously allow borrowers to take loan payments that are up to 28% of their gross monthly income, but this may be way too much for many people. A budget is simply monthly take home pay less every single expense.
Be sure to include everything: Loans, utilities, tuition, food, dining out, kid’s lunches, vending machines, entertainment, gifts, subscriptions, medical deductibles. Also, be sure to allow 10-20% to be set aside for savings. What is left is what you can afford for your mortgage payments (including tax and insurance escrow). Don’t let any lender convince you that you can afford more.
Pick a Lender You are Comfortable With: If you are having trouble due to a “hardship” situation i.e. 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 rate, shop around. Banks and credit unions are usually very straight forward and use traditional documentation when they refinance a home loan. Most will want an 80% loan to value (LTV) or better. You can check out websites, like Zillow.com to get an idea of what similar homes in your area are going for. If you have at least a 93.5% LTV, you will need an FHA loan. Mortgage brokers will have a variety of loan packages that you may be able to consider. The key difference is that with a broker, all loans will be sold to a servicer, so you will definitely be dealing with a different company after
closing.
If you plan on staying in your home for at least 5 years, you may want to consider “buying down” your rate by paying points. Each point represents 1% of your mortgage amount that you pay at closing to reduce your interest rate. Fixed rates are much easier to budget for. Adjustable rates(ARMs) will carry uncertainty of future changes in your payment amount. If you choose an ARM, be sure you fully understand how high rates can go, when they can change and what that may mean to your payments.
Be sure to understand every single term of your loan agreement(s) and every fee that you will be obligated to pay. Never be afraid or ashamed to ask questions and never settle for an answer that you don’t fully understand. A final note of caution: Once you agree to complete a loan application, the lender will be pulling your credit report. This credit report will help to determine what interest rate you will qualify for.
Too many inquiries on your credit report can have a negative effect on your score, so narrow down the lender(s) that you feel comfortable with and have most of your questions answered prior to agreeing to complete an application to refinance a home.