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How Does Refinancing Work?

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The thought of refinancing your home mortgage can be extremely stressful if you are unfamiliar with the process and haven't done your homework. On the other hand, if you have done your research and the proper cost analysis, you can avoid the common traps that people fall into - and potentially save yourself a lot of money on your monthly mortgage payment. Let's take a closer look at the refinance process so you can clearly understand what's involved in refinancing your home and how you can determine if it will be financially beneficial for you to do so.

Understanding your situation

The first step in the mortgage refinancing process does not involve a lender or underwriters or your credit report. The process starts with you simply answering the question - how long am I going to be in this home? This is the most important factor in determining whether or not it will be worth it to refinance your mortgage. Since there are a number of costs associated with refinancing, you will need to look at how long you are going to stay in your home to see if you will have enough time for the savings to make up for the closing costs. For example - let's say your current mortgage payment is $1,500 per month and your new mortgage payment after refinancing will be $1,200 - your monthly savings after refinancing will be $300. Now, let's say the closing costs on your refinance are $5,400.00. If you are saving $300 per month then you will need to stay in your home for another 18 months to justify the $5,400 in closing costs. Every month you stay in your home after the 18th month you would be realizing actual savings from your refinance transaction.

The mortgage refinance process - application, appraisal and underwriting

Now that you understand your situation and have decided to refinance, it is time to start the process. Start with your local bank and maybe a mortgage broker or two and see if the current interest rates are low enough for you to save money. If you have determined that rates are low enough then you will want to fill out an application with your lender or broker. Once you have applied, the lender will look at a copy of your credit report to see if they can "conditionally" approve your request. If your credit meets their requirements than they will approve your loan conditionally - meaning that the appraisal and income verification will have to meet the minimum guidelines in order for you to be granted a final approval on the loan request. An appraiser will come to your house to take a look at your home and property in order to put together a comprehensive appraisal report for the lender. This report will look at the condition and marketability of your home in comparison with other similar homes in your surrounding area that have sold within the last six months. This analysis will yield an appraised value of your home that your lender will use to calculate the amount of money they will allow you to borrow against your home.

The lender will also ask you for copies of you last two years tax returns and W-2 statements in order to verify your income. If your credit score is good, the appraisal is high enough and your income qualifies than your loan request will be approved.

Once the loan is approved, you will set a date for closing. The entire process usually takes about 30 days.

As you can see, there are a lot of factors involved in the decision as to whether or not you should refinance and whether or not you will be approved by your lender. If you have more questions on how refinancing works, be sure to visit out mortgage refinance section.