Refinancing to Lower the Interest Rate and Monthly Payments

Refinancing occurs when a company or an individual borrower replaces an old debt with a loan with better interest rate and terms. Alternatively, the borrower negotiates a new repayment schedule with the financial institution.

Refinancing with a new lender makes sense if the interest rates keep falling, and the mortgage comes with a low or no prepayment penalty. No prepayment penalty is assessed after a period of 5 years, which is when many borrowers decide to refinance.

Reasons to Refinance

Low interest rates are the main reason why borrowers switch lenders. For example, a reduction of 0.7 percent on a $450,000 mortgage will save you $3,150 in interest payments during the first year. This amounts to a lot of money during the mortgage term and makes a difference between loosing and keeping a home.

Borrowers resort to refinancing to reduce their monthly payments and finance major expenses. When switching lenders, applicants should provide information about their assets, including investment, retirement, and banking accounts. Financial institutions are interested in the borrower’s income and expenses, including loan and credit card payments, rent, monthly bills, and others. In addition, they should include the property’s sales price and address. Applicants should also submit supporting documentation, including a copy of the purchase and sale agreement, bank statements for investment and savings accounts, and business or personal tax returns. A profit and loss statement is also required if the applicant is self-employed. Salaried employees must present recent pay stubs. Finally, the applicant should enclose recent monthly statements for any credit line, home equity loan, or mortgage.

The bank will order a title search and appraisal to determine the value of the property. A home inspection is also required to identify whether repairs are necessary. This is a non-invasive examination that aims to assess the condition of your house. The home inspector will check for fungi, mildew, mold, and wood-destroying bacteria and organisms. They will look for sources of radiation, lead, radon, asbestos, and rodents. In addition, the home inspector will check the structural elements of your house. These include the attic and roof, the drainage, the wall covering, and the vent and waste pipes. An inspection of the sprinklers, duct work, and water heaters is also made. The borrower will receive a notice of conditional approval after the inspection.

Once the application has been processed and approved, the bank will send loan papers. It is important to read the papers and disclosures. The bank may request additional documents, items, and information before confirming final approval. Documents to present include a property appraisal, title insurance binder, hazard insurance, and documents supporting assets and income. Applicants should fill in information about their insurer, including its phone, contact name, and insurance company. If the house is located in a flood hazard area, the borrower should also buy flood insurance. The final step is to lock in the interest rate. You can do this 10 days before closing or at the beginning of the application process. Whenever applicants choose to lock in the interest rate, they should speak to a mortgage loan officer.

People refinance for different reasons, one being to finance major expenses such as home renovations and college tuition. Another reason is to switch to a mortgage with a fixed interest rate. A fixed rate of interest is beneficial in that it makes financial planning easier. The interest payments and principal won’t fluctuate with market rate fluctuations.

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