We strive to live the American Dream of homeownership. Our goals are simple: a few rooms, a place to put down roots and see our heritage flourish. People tell us to stretch ourselves to get into as many houses as we can afford. We search for what appears to be the cheapest mortgage and pick out some paint colors. Just a few years later we realize things are a bit tougher than expected, some major home improvements are needed, and we have some lingering credit card debt on us. Our mortgage no longer suits us and we need the inside scoop on how to refinance a home.
Things to gather: Regardless of your situation, you will need the following information before contacting a lender:
1. Copy of current promissory note (usually a document titled “promissory note”)
2. Most recent home loan statement with loan balance
3. Homeowners Insurance Dollar Amount and Annual Property Taxes (for escrow calculations): You may call the City Treasurer for tax information.
4. Pay stubs (for gross and net monthly income)
5. List of other loans and their minimum payments
6. An idea of your credit score (You can request a free report online).
Understand what you can afford: If you are planning to refinance a home loan, you are:
• Check to make sure you’re getting the best deal;
• Finding yourself in a difficult position due to job loss, reduced income, an adjustable rate loan, or being overwhelmed by debt;
• You have concerns about the future and want to shore up your finances before you get stuck in a difficult position with fewer options.
These three situations required that you fill out a budget to determine exactly what you can afford. Mortgage lenders will generously allow borrowers to accept loan payments of up to 28% of their gross monthly income, but this may be too much for many people. A budget is simply a monthly take home payment minus all expenses.
Make sure to include everything: Loans, utilities, tuition, food, dinners, kids lunches, vending machines, entertainment, gifts, subscriptions, medical deductibles. Also, be sure to set aside 10-20% to save. What’s left is what you can afford to pay toward your mortgage payments (including taxes and insurance escrow). Don’t let any lender convince you that you can pay more.
Choose a lender you feel comfortable with: If you are in trouble due to a “hardship” situation, ie job loss, medical bills, 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 often very straightforward and use traditional paperwork when they refinance a home loan. Most will want an 80% loan to value (LTV) or better. You can check websites, like Zillow.com, to get an idea of what similar homes are looking for in your area. If you have at least a 93.5% LTV, you’ll need an FHA loan. Mortgage brokers will have a variety of loan packages that you can consider. The key difference is that with a broker, all loans will be sold to one servicer, so you’ll definitely have to deal with a different company afterwards.
closure.
If you plan to stay in your home for at least 5 years, you may want to consider “bumping” your rate by paying points. Each point represents 1% of your mortgage amount that you pay at closing to lower your interest rate. Fixed rates are much easier to budget for. Adjustable Rates (ARM) will create uncertainty about future changes in your payment amount. If you choose an ARM, make sure you fully understand how high the rates can be, when they can change, and what that might mean for your payments.
Make sure you understand all the terms of your loan agreement(s) and each fee you will be required to pay. Never be afraid or embarrassed to ask questions and never settle for an answer you don’t fully understand. One final note of caution: Once you agree to complete a loan application, the lender will obtain your credit report. This credit report will help determine what interest rate you will qualify for.
Too many inquiries on your credit report can have a negative effect on your score, so limit the number of lenders you’re comfortable with and get most of your questions answered before agreeing to complete a home refinance application. .