When a mortgage is refinanced, a current home loan is replaced with a new one. There are many reasons to take this step. Some Illinois homeowners wish to refinance in order to secure a loan with a better interest rate. Other homeowners opt to refinance a mortgage to switch to a different type of loan, cut down monthly payments, or tap into a home’s equity. Regardless of your goals, here’s what you need to know about refinancing a mortgage.
What a Refinance Does
When you took out your original mortgage loan, the money went to the home’s seller. With a mortgage refinance, however, you’ll be paying off the remaining balance of your existing mortgage loan to the lender while also taking out a new loan with the same or a different lender. It is a good idea to consider what kind of refinance you prefer based on your financial goals. If you wish to receive extra money to make home improvements, take a vacation, pay off debts, or take care of other personal or financial needs, for example, you may opt for a cash-out refinance.
Qualifying for a Loan and Applying
You’re certainly welcome to see if you can refinance with your current lender. Whether you do this or go with an entirely different lender, you’ll still need to qualify for the new loan. The terms of lending will depend on the type of refinancing you wish to do. Requirements typically include:
- A good credit score*
- A decent amount of home equity
- An acceptable debt-to-income (DTI) ratio
*A “good” credit score for loans of this nature is typically at least 620.
You’ll also want to consider the closing costs associated with a refinance. However, you may be able to roll these costs into the new loan if you have enough equity in your home to qualify for a no-closing-cost refinance. With the application, you’ll be required to submit certain items or documents such as recent pay stubs, bank statements, and W2s.
Wrapping Up the Process
Once you’ve completed the application, it will be reviewed by your lender, and your personal and financial information will also be verified. Additionally, you’ll receive a loan estimate that will give you a breakdown of what to expect with fees and costs related to your new loan. With some refinancing loans, you’ll be required to have a home appraisal done. You may be able to avoid this step with certain refinancing options like a VA loan. After receiving a closing disclosure, you’ll close on the loan and have a chance to bring up any other questions or concerns you may have.
Lastly, it can be helpful to:
- See if you can, at least, get your loan duration matched to what you have left with your current loan
- Use a mortgage refinance calculator
- Shop around and compare rates and options before making a final decision
- Consult with a real estate attorney (see below)
How a Real Estate Attorney Can Help with Refinancing
As is the case with an initial home loan, a refinanced mortgage will require you to review and sign various legal documents. Because the terms of a new loan will likely be different than the original loan, it can be worth taking the extra step to consult with a real estate attorney. An experienced lawyer can help you to review the lending documents and ensure that all stated terms are clear, reasonable, and legal.
