In a refinance transaction, you essentially pay off your current mortgage and take out a new one with different terms that match your refinancing needs.
Because refinancing involves many of the same steps that you followed to get your current mortgage, you may already know what to expect. However, you may encounter some additional steps in the process, so it helps to give some thought to your personal and financial eligibility and to be aware of your lender's requirements for the new loan.
Your Personal Situation
To determine if refinancing your mortgage is right for you, ask yourself a few questions:
- What are my reasons for refinancing?
- How long do I plan to stay in my home?
- How many years remain on my existing mortgage?
- Have I built up equity in my home?
- Can I afford the costs involved?
- Will I save money over the life of my new loan?
With answers to these questions in mind, you will be better prepared to discuss your refinancing needs with your lender or mortgage broker.
Your Financial Eligibility and Other Lender Requirements
To be eligible to refinance a mortgage, lenders usually require that you have at least 5 percent equity accumulated in your property. Equity is the difference between what your property is worth and the amount you still owe on your mortgage. For example, if your house is valued at $100,000, and your mortgage balance is $90,000, you have $10,000 (or 10 percent) equity in your home.
As with the traditional mortgage process, your lender will require you to complete a loan application. The loan application helps the lender assess your financial situation, credit history, the property value, the amount of equity in your home, and other data.
To process your loan application, your lender typically will require:
- Verification of employment and income;
- Information about debts and assets;
- Account numbers and balances for savings, checking, and other financial accounts;
- A title search of the property;
- A copy of the site survey;
- An appraisal (in some cases, an exterior-only appraisal); and
- A copy of your hazard insurance policy.
Your lender also will require information about your present mortgage, including:
- Your current monthly payment,
- The outstanding mortgage balance,
- The status of your property tax and insurance payments, and
- The mortgage lender's contract information (if you're not refinancing through your original lender).
Streamlining the Process
Lenders that use an automated underwriting system may be able to provide you with a speedier refinance process with reduced paperwork. An automated underwriting system often allows a lender to provide you with a loan approval decision in minutes by requiring fewer pieces of information from you at the time of loan application and, in some cases, eliminating the need for a full appraisal of your home (using an exterior-only inspection or a property inspection report).
