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Understanding the Process of Refinancing Mortgages

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In today’s low mortgage rate environment, thousands of homeowners are considering refinancing their current mortgages.  But the process isn’t as simple as many think, so it’s important to understand what refinancing entails before jumping on the trending wagon.

First, homeowners need to figure out if refinancing actually makes sense for them.  Homeowners must understand why they want to refinance: Is it to lower monthly payments, to take additional cash for other uses, or shorten the term of their loans to save money over the long term? Once homeowners determine why they want to refinance, they can consider whether a 30-year or 15-year mortgage (or another term) makes more sense, or whether they should skip refinancing and maybe make extra payments to pay off the mortgage faster.  If homeowners do decide to refinance, they should calculate the anticipated costs of their new mortgage payments using a mortgage calculator and then factor in closing costs to weigh the financial benefits of their decision.

Once a homeowner has decided to move forward with a refinance, the process looks like this:

Find a lender
Homeowners don’t have to refinance with their current mortgage lenders. Instead, they should shop around for the lender with the lowest rate and best customer service reviews. Once a homeowner has selected a lender, the owner should call the company to see what documentation the lender requires to process the refinance loan.

Gather documentation and submit an application

Typically, the lender asks for past tax returns, pay stubs, proof of assets, list of debts and other financial documents; the documentation needed varies from lender to lender.  Once homeowners gather all the necessary documentation, they should fill out and send in the application provided by the lender.  The application asks for information such as the homeowner’s income, employment information, assets and liabilities and information about the property. The lender then reviews the application, runs the homeowner’s credit score and should, within three business days, provide the homeowner with a good faith estimate, which outlines the loan costs and terms.

Wait for loan approval
If the homeowner agrees to move forward with those loan terms, the lender begins the process of officially approving a homeowner for a refinance. To do this, the lender verifies everything in the application.  Homeowners should be prepared to answer questions about the information in the application and provide additional documentation on everything from income to liabilities and assets, to child support or alimony payments.  The lender also orders an appraisal of the home to determine the amount of equity the homeowner has in the home (typically, lenders like borrowers to have 20 percent equity or more in their homes).  Depending on the current market conditions, the loan approval process may take up to 60 or 90 days, and sometimes even longer.

Lock in the rate
Once homeowners are approved for a refinance, the lender gives them a loan commitment, which includes the interest rate, closing costs and fees.  If the interest rate is satisfactory, homeowners typically lock in the rate. Though, rates can generally be locked in at any time during the application stage.  Locking the rate means the lender guarantees that interest rate for a set period of time, typically 30 to 60 days. This lock-in period is designed to give the homeowner sufficient time to close without risking the rate changing.

Close on the loan
The final step in this process is to close on the loan, during which time the homeowner completes and signs all closing documents and pays any fees. The new lender sends money to the old lender paying off the homeowner’s former mortgage.  Homeowners should ask questions to clarify anything they are unsure of before signing documents or handing over money, which finalizes the refinance.  

Editor's Note: This content is not provided by Citi. Any opinions, analyses, reviews or recommendations expressed here are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by the Citi or any of the other companies whose products are featured in this content.

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