Mortgages can be complicated (and a little bit boring to most people). But they are big financial decisions, so it’s best to know what’s going on. Here are three important things to know before you decide to refinance.
1. Rate Locks
While you are shopping for a loan, you will get quotes for various interest rates. But those rates may move with the market and change. The time at which a customer can lock a loan varies across lenders. It’s common, however, that you’ll have the opportunity to lock your interest rate for your loan after you commit to working with a lender. You’ll have to make a choice – do you lock early to avoid rates going up? Or do you ride the market, hope they go down, and time your decision?
So what happens if you lock too early and rates go down? You always have the option to walk away, but you’ll have to start the process over. If you want to proceed with the loan, you have some options. If the market moves significantly in your favor, you may be eligible for a float down – your lender will adjust your rate, so it is more in line with the going rate.
2. Paying off your existing loan
There are a few concerns when it comes to paying off your existing loan. The balance of your existing mortgage is constantly changing. Interest is added on a daily basis, and payments are applied monthly. To get an accurate assessment of what you owe, you’ll request a “10-Day Payoff Amount” from your current lender – pay the total within the time period, and your mortgage is satisfied.
Because your outstanding mortgage amount is a moving target, the lender you are refinancing with will often use a rough estimate throughout the process. In many cases, your new loan may be slightly higher than your existing mortgage. So what happens to the extra money once you close your new loan? Don’t worry, this is a common occurrence – when the amounts don’t line up, your existing mortgage servicer is required to refund you any overages.
3. One at a time
It’s an exciting day when your loan gets approved, but it’s important to remember that you’re not in the clear yet. Your approval is based on your personal situation at that moment in time, and it can change if your situation changes. To avoid any hiccups, it’s important to avoid any major financial transactions while your loan is being processed.
Cash-out refinances can be especially tempting. Once your loan is approved, you may have the urge to hire contractors, buy furniture on credit, or make some purchases on your credit cards. But any major change to your cash balances, new lines of credit, or increases to your monthly debt payment amounts could be enough to change the terms of your loan, or worse — the conditional approval could change to decline due to too much debt. Try to avoid any major transactions until after your loan has been closed.
Questions? Call (415) 915-6934 or chat with a licensed Loan Specialist or get a rate quote online in 3 minutes.