If you own a home, you may have been hearing about refinancing options in the news. The global spread of COVID-19 has impacted our economy in many ways, including mortgage interest rates, which continue at all-time lows.
Many homeowners are looking at refinancing as a way to help cope with job loss or economic instability, or to simply take advantage of financial benefits.
What is refinancing?
In a nutshell, refinancing is the process of replacing your current mortgage with a new mortgage that has better interest rates. Here are some of the benefits that you may be able to take advantage of when you refinance:
- Build equity faster. When you have a lower interest rate, it means that more of your monthly payments are going toward the principal. This allows you to build equity in your home faster.
- Lower monthly payments. Getting a lower interest rate can also make your monthly mortgage payment go down.
- Faster mortgage payoff. With a lower interest rate, you’ll end up spending less money over the life of your mortgage. This means that you may be able to pay off your mortgage sooner.
- Access equity. When you do a cash-out refinance, you’ll borrow against the equity in your home and receive a lump sum of money at closing. This can be a good way to pay off other high-interest debt, save for retirement, or make a large purchase.
- Change programs. Some homeowners who started out with an adjustable-rate mortgage may want to switch to a fixed-rate mortgage for added stability.
Is it right for me?
The thought of cashing out home equity or lowering a mortgage payment can seem like a lifesaver, but only you can decide if it’s the right move to make. Refinancing typically requires a payment of 1%-2% of your home’s value, so not everyone will benefit from refinancing, especially if your home was purchased recently or you’re planning to move soon.
How do I get started?
The best place to begin when considering refinancing is to reach out to your current lender on your mortgage statement before talking to a new lender. You’ll need to apply and be approved for refinancing, so make sure that you have all of the documents necessary before you apply.
Here are some of the documents your lender will want from you when refinancing:
- Unexpired government-issued ID
- Pay Stubs from the most recent month or the previous 30 days
- Bank statements from the last two consecutive months, including all pages, even if they are blank
- W2s from the last two years
- Documentation for any other source of income that would be used to qualify for the loan, such as pension or social security
- If you own any rentals, you’ll need to provide a complete breakdown of the mortgage or rent you charge, property taxes, insurance, and lease agreement
- Copy of homeowners insurance policy and most recent statement for any/all mortgages
If you’re self-employed, you’ll also need to provide:
- The last two years’ federal tax returns with all schedules
- Business tax returns for the most recent two years. If your business is younger than that, then provide all the information you can
- Provide K-1 for any business that you have a percentage of ownership in greater than 25%
Once you have these documents gathered, you can apply for refinancing.
What about forbearance?
Because of COVID-19, congress recently passed a law called the CARES Act that provides options for homeowners to let their mortgage go into forbearance or have the payments deferred to protect from foreclosure if they lost their income. However, you will not be able refinance your home if your mortgage is in forbearance. You must be completely caught up on your mortgage payments to refinance.
“The logic behind this is to discourage people from sending their mortgages into forbearance just because they can,” says Shelly McEntire, from The Expert. “Forbearance should be used by people who really need it due to job losses or income cuts. I recommend that you only use forbearance if you have to, not just because it’s there.”
Additionally, forbearance shows up on your credit report as deferred, just like deferred student loan payments, which shows lenders you cannot meet your current debt obligations. These are important facts to know about forbearance for homeowners considering refinancing because credit requirements have tightened since COVID-19 began, meaning that riskier programs have gone away and mortgage lenders are requiring higher credit scores to qualify says Lane Penger.
Make sure that you consider all the ramifications of forbearance before you make a decision.
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