How to Go About Refinancing a Mortgage

Mortgage rates are hovering at near-record lows at the moment.The popular 30-year fixed-rate mortgage has rarely been lower, making it the opportune time to look into a refinance.Unfortunately, underwriting at banks and mortgage lenders has become much more stringent, with most requiring full documentation of income, assets, and job history.So getting that approval isn’t as easy as it used to be.But perhaps a few step-by-step instructions will make the plight a little bit easier.1. Assess Your Current MortgagePull out your loan paperwork and take a look at your loan balance. Then do a quick search online for a free home value appraisal (e.g. Zillow).Once you’ve got these two numbers, you’ll be able to get a rough idea of your loan-to-value ratio (LTV), which is your current loan balance (1st and 2nd mortgages, if applicable) divided by your current home value.Example:Home value: $500,000
Loan balance: $400,000
LTV: 80%In this particular scenario, you’d have 20% home equity, which makes refinancing a whole lot easier.If the LTV was higher, refinancing could be impossible, or much more restricted.And if you’re underwater on your mortgage, meaning the loan balance exceeds your current home value, you might be out of luck entirely.2. Take a Look at Your FinancesThe next step is to take a hard look at your finances. This includes income, assets, and employment history.You’ll need to know how much you’re making each month, how much you’ve got in the bank for reserves, and how long you’ve been with your current employer.If you recently changed jobs, refinancing will be extremely difficult. Or if you’ve become unemployed, banks will likely decline your refinance application.3. Get Your Credit ScoresAfter you get your finances together, obtain your credit scores. Credit scoring is a huge determining factor of mortgage approval.If your score is too low, you could be out of the game quickly. That’s why it’s imperative to check your credit scores early on to ensure your credit is in good health. If it’s not, take measures immediately to improve it.4. Shop Around!Once you’ve got a good idea of your current mortgage situation, your finances, and your credit scores, you can begin to shop around.You’ll want to compare mortgage rates online and with your local credit union or bank. Also try a mortgage broker.Most consumers only obtain one mortgage quote, which is clearly a huge mistake. You’re not shopping for a plasma TV here, you’re shopping for a mortgage. So take your time!5. What Type of Refinance Do You Want?When shopping, be sure to determine which type of refinance you’d like. You can go with a rate and term refinance, which simply changes the interest rate and term of the mortgage, while keeping the loan amount the same.For example, switching to a 30-year fixed from a 5-year ARM.Or you can go with a cash-out refinance, which will also increase your loan balance, with the extra amount going to your bank account. This cash can then be used to consolidate debt or make home improvements.Finally, there’s a cash-in refinance, where you pay down your loan balance at closing, which can lower your monthly mortgage payment and interest paid throughout the life of the loan.Compare all these options side-by-side with a loan representative to determine if refinancing makes sense.