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What homeowners should know about refinancing a mortgage

  • Refinancing can be an easier process than purchasing a home
  • Understanding options is critical to finding the best deal
  • Refinancing could mean cheaper payments and a shorter loan

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(NewsNation) — Homeownership can be an important investment for Americans, but refinancing a mortgage allows residents to use their actual house as a leveraging agent on that investment.

It is a means of trading in a homeowner’s current mortgage for a newer one and can often mean a lower house payment or a way of shortening the terms of the agreement or drawing cash out from the home, real estate experts say.

However, experts also say that there are pros and cons associated with refinancing a mortgage, which makes it important for homeowners to understand the process and how to make it work.

According to experts from Rocket Mortgage, refinancing a mortgage can often be easier than purchasing a home.

How refinancing a mortgage works

The first step in refinancing is determining which option works best for each homeowner. From rate and term refinances, which allow the homeowner to change the interest rate and terms of the agreement, to cash-in and cash-out options and a no-closing cost refinance, selecting the most sensible type of refinancing agreement is among the most critical steps, experts say.

Once a homeowner has decided which type of refinance to pursue, choosing a lender becomes the next step in the process. Homeowners are not required to continue with the same financial institution their original mortgage was financed through and can base their decision on which lender will offer the best rate and terms.

Experts encourage homeowners to shop around and use customer reviews to determine which option is most suitable.

Homeowners will then need to gather the necessary documentation for the refinancing process. In many cases, the documents will be the same paperwork that was used to purchase the home. Required forms may include recent paystubs, pertinent W-2 tax forms, or bank statements. In many cases, a spouse’s documentation will also be required if they will also be included on the new mortgage, experts said.

After a homeowner has been approved for a refinance, they will need to select the interest rate that makes the most sense. This ensures that the interest rate does not change before the refinancing process has been completed. Again, each comes with pros and cons, according to Rocket Mortgage.

Rate locks last between 15 and 60 days and depend on factors such as the location of the home, the loan type, and the lender.

Experts say that homeowners may receive a better rate if they lock in for a shorter period so that the lender does not have to hedge against the market for an extended time, according to Rocket Mortgage. However, a shorter period also runs the risk of the lock period ending, which could cost the homeowner more in the long run.

Another option is to float the rate, which means not locking in a rate, which means that a homeowner could find a lower interest rate. However, by not locking in a rate, it may fluctuate before the refinancing process is complete.

The next and final steps of refinancing

Once that is complete, the lender will complete the underwriting process during which personal financial information is verified. That process will also include verifying the details of the person’s home, which includes an appraisal, and determining the home’s value.

The refinancing appraisal is among the most critical parts of the process since it will determine which options are available moving forward and will determine how much cash can be taken out of the home if that is part of the goal, experts said.

If the appraisal is the same as when the home was purchased, the underwriting process ends. However, if the appraisal comes in lower than needed, it may not allow a homeowner to meet the standard of the lender’s requirements for refinancing, which could force a homeowner to look elsewhere or to bring cash to the deal to get the desired terms.

Once the appraisal is complete, the mortgage refinancing is ready for closing, signifying the end of the process. Experts say that in many cases, closing takes place faster in refinancing deals than it did for the initial home purchase. Like with the initial home purchasing deal, homeowners will have a few days before the deal has been locked in, giving them time to cancel their new deal before a three-day grace period ends.

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