How a Refinance Works?

Many consumers are apprehensive of asking for refinancing of their loans as they are not really sure how a refinance works, though it can help save them quite a few dollars every month, adding to thousands of dollars over the span of loan. Here’s a simple example. On taking a loan of $300,000, payable over a period of thirty years and carrying 6% rate of interest, you’ll need to pay $1,811/month and the total amount of interest you would have paid for the duration of the loan would be $285,845. The same amount carrying interest @4 ½%would cost you $1,579/month and the total payable interest for the length of loan would come to$203,100. Now, as far as how a refinance works, it’s not really different from the process you followed while applying for the first mortgage. Refinance offers you the added advantage of fulfilling your present loan.

Application

Once you decide to go for refinancing, you need to obtain an application from your selected lender. Should you have any doubts, talk to their representative. Fill up all the details asked for in the application, attach all the needed supporting documents and submit the same along with the requisite fee. You’ll need to provide copies of your tax returns and W-2 forms for the last 2-3 years along with your paystub for one month and bank statements for three months. On choosing you original banker for refinancing, you are required to submit only those documents that aren’t there already. Sign all the relevant disclosure forms like privacy, servicing truth-in-lending and good faith estimate.

Underwriting

The bank analyses your application and scrutinizes your credit report. Using your financial statements, the underwriter gets your monthly income for comparing that to your latest monthly payment and debt, already contained in your credit report. Normally, the bank wouldn’t like above 28% of your income going to housing requirements including mortgage, tax and insurance and no more than 36-40% towards serving your debts on the whole. However, these figures may vary a bit with various lenders. If your debt has increased since you availed the original loan, in all likelihood you’ll be disqualified even if the payment is smaller. The lender will order an evaluation of your property to ascertain correct loan-to-value ratio for providing new loan. Once again, you are not likely to qualify if the value of your property has dropped.

Commitment

After the lender has decided to provide you funds, you’ll receive a commitment letter from them, promising to lend you cash, enabling you to pay your present loan. The conditions stipulated in the letter must be strictly adhered to for closing the deal. You’ll be given a definite amount of time for accepting the offer. You just sign that letter and send it back to the lender along with the required fees, if any.  After you accept their offer, you get about 30-60 days for closing the loan.

Closing

Get in touch with your lender and fix a date for closing the deal. Having fixed the date, approach your present lender and ask for a payoff statement. The statement gives all details pertaining to principal amount, interest thereof, cancellation plus administrative charges payable on loan. Usually, lenders charge some fee for providing this statement and take 2/3 days for issuing the letter. Ensure to collect it before the closing date. At the time of closing, you’ll need to sign all documents connected to your new loan. The new lender will transfer funds to your new account after three business days and file a new lien to replace the previous one.

Now that you are aware how a refinance works, you will appreciate the benefits of refinancing and save your money.

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