Home refinancing offers homeowners a reward for timely payments and an improved financial situation by allowing them to restructure their mortgage with lower rates and payments. The process to refinance FHA or VA loans into a conventional loan may seem daunting at first, but with expert advice, and the proper paperwork, it’s easier than most homeowners realize. Refinancing to a conventional loan involves five important steps.
- Determine The Desired Payment: When looking at a refinance, homeowners must decide the amount they are comfortable paying. There are two areas where there is flexibility in the refinancing terms. First, homeowners can choose either a 30 year or 15 year term. A 30 year term offers the lowest monthly payments, but that comes at a cost of tens of thousands of dollars in interest fees over the course of the loan. A 15 year term allows homeowners to pay off the mortgage more quickly, though the average monthly payment is slightly higher. The second area of flexibility is the rate type. Refinancing to a fixed rate term when the prime rate is low gives homeowners substantial savings, especially when moving from an ARM. Online mortgage calculators are fantastic tools that assist homeowners in seeing the impact of term and rate changes on their loan.
- Evaluate The Home’s Equity: The most important step in the refinancing process is establishing the amount of equity the homeowners currently hold in the home. If the current equity is less than 20% of the appraised value of the home, it’s likely the lender refinancing the loan will require the purchase of costly private mortgage insurance, which can offset the savings reaped in the refinance.
- Check Credit Reports: Loan rates are determined by the borrower’s income to debt ratio, and the credit history of the borrowers. Before applying for any loan, potential borrowers must check their credit reports for any mistakes, pay past due bills, and repair an blemishes that will impact the rate negatively. If there are several black marks on the report, it may be best to wait several months for the credit score to improve.
- Gather The Documents: Just like with the original mortgage, homeowners must provide evidence of every aspect of their finances. Different lenders require different levels of of documentation, but at the very least, the homeowner should be prepared to present tax returns and bank statements for the last several years, prior mortgage documents, and an appraisal statement on the property.
- Look For A Mortgage Broker: After evaluating their needs, homeowners can shop for the best mortgage rates. The best place to start is with the original lender, giving them an opportunity to make an initial offer on the refinance. With that offer in hand, homeowners can then shop around for better rates or terms with other mortgage lending or refinance specialists. When the homeowner has several offers for a conventional loan on the table, they have the power to choose the best combination of rate and terms for their situation.
Refinancing a mortgage to a conventional loan offers homeowners short and long term payment relief over the life of the mortgage. Because of the potential for savings, it’s vital that homeowners take their time, and collect more than one offer before making the final decision.