To some, the word “refinance” has a stigma attached to it similar to bankruptcy; the idea of it brings about concern over the desperate state of the homeowner using their house as a means to get out financial trouble. This is inaccurate, of course. For many, refinancing is simply a smart move, either to take advantage of home equity, to lower monthly payments, and/or to shorten or extend the length of their original home loan. Whatever the reason, it’s a common practice among homeowners, so you needn’t feel overwhelmed at the prospect of refinancing. That said, refinancing isn’t a light decision, either. It should make financial sense in the short and long term, and there are some things to consider before you can even qualify.
The decision to refinance or not is deeper than can be covered in a blog since much of it is case-by-case. Instead, this article is a broad checklist of items and knowledge you should have on hand after you’ve decided to look into refinancing in earnest.
As with any large transaction where banks or lenders are involved, paperwork is no small part of refinancing. Like the original home loan, the trustworthiness of the buyer, i.e. you, will again come into question. You can expect the usual: paystubs (3 months), tax forms (W-2, 1099), and credit score reports. The latter brings up a recurring need to clean your credit before consideration or keep it clean if you’ve already taken steps over the years. Also, bear in mind that self-employed borrowers generally need to go through extra steps to show proof of income–such as providing profit statements–as much of their income and expenditures aren’t as thoroughly documented. You’d think credit reports would be enough, but most lenders will also want to see proof of your outstanding debt or lack thereof, as well as documents that validate your current assets to determine your ability to cover upfront costs.
You’ve dealt with banks and lenders before, so by now, you know how much they enjoy adding fees onto an existing transaction. They have to get paid for their time, after all, as well as the “inconvenience” of renegotiating a deal they’ve already struck. Expect lofty bank costs as the ‘paying for labor’ portion of the total expense, as well as lawyer, insurance, appraisal, and possible closing fees. A savvy realtor will help you decide how these fees affect the viability of refinancing.
The lender accepts the remaining loan amount on your behalf, so there will be payoffs and penalties to account for their losses in terms of interest and additional fees that would have accrued over the course of loan payment. Payoffs may include fees for the principal balance, interest, and escrow, while penalties are generally percentage-based. For example, prepayment penalties protect the lender who accepts the original loan, and it can exceed tens of thousands of dollars depending on the actual cost; these costs are passed on to you, of course.
Unless you or someone close to you is in the industry, seeking professional help should be part of any refinancing checklist. Having an experienced consultant in your corner could save you thousands of dollars. We’re here to help walk you through the specifics and explain the items listed above, so you can feel safe in the knowledge you’re not entering a refinancing operation without foresight.