By refinancing your conventional mortgage loan -- any mortgage loan not guaranteed or insured by the federal government such as an FHA-insured loan -- to one with a lower interest rate, you can shave hundreds of dollars off your monthly home loan payment, depending on your new interest rate. However, successfully refinancing a mortgage loan isn't the simplest of tasks -- and it will cost you.
Call several mortgage lenders to shop for the lowest rates and fees. You are under no obligation to work with the mortgage lender to which you now send your monthly payments. You can work with any mortgage lender licensed to do business in your state. Shopping around is important because a mortgage refinance is not free. According to the Federal Reserve Board, you can expect to pay from 3 to 6 percent of your mortgage loan's outstanding balance in closing fees. This means that if you're refinancing a mortgage on which you owe $150,000, your closing costs can run from $4,500 to $9,000. By calling several mortgage lenders, you might find one that charges less.
Once you find a mortgage lender that you like, it's time to fill out your Uniform Residential Loan Application. This form officially starts the refinance process. You'll have to provide such information as your current address, Social Security number and estimated gross monthly income. The application will also ask if you have any negative judgments, such as a bankruptcy or foreclosure, in your past. You'll also need to make copies of such financial documents as your last two years' income-tax returns, your savings and checking account statements from the last few months, and well as your last two paycheck stubs. You'll provide these copies to your lender along with your completed loan application. Your lender will then study your finances to make sure that your total monthly debts, including your estimated new mortgage payment, do not exceed a certain amount -- typically more than 36 percent of your gross monthly income.
Your lender will also look at your credit score -- which is a number based on an analysis of the information in your credit report -- and an indication of your credit worthiness. Your three-digit credit score is important for a refinance. Lenders usually reserve their lowest interest rates for those borrowers who have credit scores of 740 or higher. You'll need a high credit score to qualify for interest rates that are low enough to make your refinance financially worthwhile.
Your lender will also order an appraisal of your home. During an appraisal, which will usually cost you about $400, a real estate appraiser will determine the current market value of your home. This figure is important, too. Most conventional lenders require that you have at least 20 percent equity in your home before they'll grant you a refinance. If your residence has lost value, you might not have this amount of equity.
If your lender approves your request for a refinance, you'll have to sign the closing papers and pay your closing costs, officially completing your refinance to a new mortgage loan. While you can pay closing costs as a lump sum, most lenders will let you roll them into your future mortgage payments.
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