How Does Mortgage Refinancing Work?

Need to know how does mortgage refinancing work? You've seen how low mortgage interest rates have fallen. You see, too, that you're paying far higher rates on your own mortgage loan. You've decided that it's time to refinance your loan to take advantage of these low rates. You have just one question: How does mortgage refinancing work? That's a big question. If you've never refinanced your mortgage loan doing so can seem like a complicated and time-consuming task. Fortunately, your mortgage loan officer will guide you through the process. Here, though, is a crash course on how mortgage refinancing can save you a significant amount of money each year.

1. Shop around for a mortgage lender. When refinancing, you don't have to work with the mortgage lender that services your current loan. You can shop around with several others to find the lender who charges the lowest origination fees and can provide you with the lowest interest rates.
2. Make copies of your important financial paperwork. Your mortgage lender will want to verify that your monthly debt obligations, including the estimated value of your refinanced loan, are less than 36 percent of your gross monthly income. This will give the lender assurance that you can afford to make your new mortgage payments. To verify your income and debts, you'll have to make copies of your last two paychecks, last two years' income tax returns, credit card bills, savings and checking account statements and other loan statements.
3. Give your lender permission to access your credit scores. You'll need a credit score of at least 720 to qualify for the lowest interest rates from most traditional mortgage lenders. You'll have to give your lender permission, then, to run your credit. If your score is too far under 720, you might not qualify for low-enough interest rates to make a refinance worthwhile.
4. Wait for your housing appraisal. Your mortgage lender will order a housing appraisal to determine the current market value of your home. You'll need at least 20 percent equity in your home to qualify for a refinance from most lenders. If your home's value has dropped since you purchased it, you might not have this equity. You'll have to pay for your appraisal, about $400 usually, even if you don't have enough equity to obtain a refinance.
5. Determine if your monthly savings are enough to justify the cost of a refinance. Refinances aren't free; most mortgage lenders charge from $2,500 to $4,000 for a refinance, depending on the size of your mortgage loan. Make sure that the amount of money you'll save in mortgage payments each month is significant enough to allow you to quickly make up these refinancing fees.
6. Set a closing date. If your credit score, housing appraisal and debt-to-income ratio come in at the right levels, your lender will most likely approve you for your refinance. You'll then have to agree to a closing date. On this date, you'll sign the papers that make your refinance official and pay any fees that are due. You will then begin benefiting from a smaller monthly mortgage payment.

Sources:

The Federal Reserve Board