What does it mean to refinance? 

Mortgage refinancing is when a homeowner takes out a new mortgage loan to pay off an existing one. Most borrowers are seeking better terms—either a reduced interest rate or a shorter loan term. For others, a refinance enables them to cash out home equity for home improvements or pay off high-interest debt. 

How much does it cost to refinance a mortgage? 

Just like your original mortgage, there are closing costs. Refinancing can cost between 2% and 8% of a loan’s principal, depending on the lender, size of the loan, credit score, mortgage term, mortgage type, and available home equity. It’s essential to consider the costs to refinance before proceeding with the loan application.

Should I refinance my mortgage now?

When interest rates are low, you may wonder, “is it a good time to refinance my home?” While it’s often a solid financial move, it’s not right for everyone. Here’s what to consider:

  • The lower rate – If the new interest rate is just slightly less than your current rate, determine how much you’d save on interest over the life of the loan. Make sure it’s more than the closing costs.
  • How long you’ll stay in your current home – If you’re planning to move soon, the costs of refinancing may negate the potential savings. Work with a mortgage professional to crunch the numbers.
  • Your credit score – Has your credit score improved since you bought your home? If so, you may qualify for more favorable terms when you refinance. 
  • Your income – Are you earning more money than when you first purchased the home? If you can afford a larger monthly payment, you might want to refinance the mortgage for a shorter term.
  • Adjustable vs. fixed rate – If your current mortgage has an adjustable rate and it’s about to go up (or already has), you could refinance into a mortgage with a lower, fixed rate.

When not to refinance your house? 

There are some scenarios when it’s not a good idea to refinance your mortgage. As noted above, you want to make sure the savings from a lower interest rate will be enough to make refinancing worthwhile. Here are some examples of when you may not want to refinance: 

  • The new interest rate is not significantly less than your current rate.
  • You’re planning to move in the next few years.
  • You only have a few more years to pay off your mortgage.
  • Your credit score has gone down since the original mortgage approval.

It’s also important to be cautious when using a mortgage refinance to consolidate debt. While it may feel like a relief to have a lower monthly payment, this often means a longer loan term—and more interest over time. As with all financial decisions, assess both the short and long-term implications before moving forward.

What to expect when you refinance your home

If you decide to refinance, the process will be similar to when you first bought your home. If it’s been a while, be sure to refresh yourself on common mortgage terms with our glossary. Then, start preparing these financial documents.

Pay Stub

Homeowners must show lenders their proof of income. Be prepared to submit two to three months of pay stubs. If you’re self-employed, they’ll want to see your Profit and Loss Statement.

Tax Returns and W2s and or 1099s

Lenders will also request the last two years of tax returns, as well as W2s or 1099s. This information gives them a better sense of your overall financial status and shows trends or variability in your income.

Credit Report

Your lender will pull your credit report, so it’s important to know where you stand before you apply for a mortgage refinance. In general, a score of 720 or more results in the best rates.

Statements of Outstanding Debt

Get ready to share information about all debts that you’re currently paying on a monthly basis such as student loans, car payments, or credit card bills. You’ll provide the total debt and minimum monthly payment.

Statement of Assets

Most lenders request the last 60 days of statements for each type of banking account. This could include checking or savings accounts, CDs, retirement plans, or investments.

Finance Your Mortgage with Prosperity Home Mortgage

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