If you own a home in the City of Chicago, you’re already familiar with the high cost of living that comes with it. Finding ways to save money is always on the mind, but you need to remember that there are some costs associated with refinancing.
Here at Neighborhood Loans, we’ve streamlined the Refinance process to help you save money and stay stress-free. We sit down with our clients to go over the best possible option for you, and only move forward with the process if it makes financial sense. Every homeowner wants the lowest interest rate, but sometimes your homebuying schedule and the market don’t line up. That’s where refinancing comes into play.
Before you jump into the refinancing process, it’s important to outline your goals. There are many different reasons to refinance a home and while a lower interest rate is one, there are other ways to take advantage of refinancing.
Common Reasons to Refinance
It’s important to recognize why you’re refinancing your home. Listed below will be some of the most common reasons homeowners are refinancing.
Lower your Interest Rate
Lowering your interest rate is the most common reason to refinance a home. If you’re able to secure a rate that is lower than your current one, it is usually worthwhile to refinance! As you know, a lower interest rate means a lower monthly payment and paying off your home faster. It’s important to shop around and visit a few different lenders – depending on your financials, they’ll be able to offer you different rates.
Shorten your Term
If you’d like to pay off your mortgage faster, while saving money on interest, you can shorten the length of your term. For example – if you have 25 years remaining on a 30 year fixed mortgage but can now pay off your home in 10 years, refinancing will allow you to do so. The shorter your term, the faster you build equity in your home, and the quicker you own your home. If possible, you can also lower your interest rate during this process.
Switching from an Adjustable Rate Mortgage to a Fixed-Rate Mortgage
Many people get into adjustable-rate mortgages with the intention of selling the home after the fixed period ends. If rates are on the rise and you’re looking to get out of your adjustable-rate mortgage, refinancing to a fixed-rate mortgage is one of the best options! While you might not be able to secure a lower rate – you won’t have to deal with the added costs and worry of a constantly changing interest rate.
Removing Private Mortgage Insurance (PMI)
Private Mortgage Insurance might have been required for your home loan if you weren’t able to put 20% down at the time of closing. If your loan-to-value (LTV) ratio is 80% or below, the PMI can be removed from your monthly payment. It will be automatically removed once your LTV reaches 78%, but if you’re looking to refinance, removing PMI at 80% is another way to save money.
If you’re interested in making additions or improvements to your home, you can use a cash-out refinance program. Using the current equity in your home to increase its overall value is a great way to invest in your future. There is an endless list of different home projects you can get completed with a cash-out refinance.
If needed, you can use the current equity in your home to pay off other expenses. While this will be a setback and take longer to pay off your home – it could be useful if you’re in a pinch for cash.
If you are in a loan program that is backed by the Federal Housing Administration (FHA), there is a refinancing program just for you. The process is ‘streamlined’ because qualified borrowers don’t have to worry about an appraisal and don’t have to provide extensive documentation. You must be current on payments and be able to benefit from the transaction, but it is a great option for an FHA homeowner looking to do any of the above.
Once you’ve outlined your goals and decided you’re ready to refinance, it’s time to fill out an application with your lender.
To fill out an application, it’s important to have these documents and information at the ready:
-General Info like Name / Date of Birth / etc.
-Social Security Number
-Income and Assets
-Property Address and Estimated Value
-Current Principal Balance
This refinance process can be completed quickly, but the application is just the first step. If you have any questions when filling out your application, reach out to your loan officer and they will help guide you through it. Once they finish reviewing your application, they’ll send it through the channels of their organization to get you approved.
Now that you’re approved and have chosen a mortgage program with your lender or loan officer – they’ll start asking you to provide the required documents. It’s important to keep open lines of communication with your lender to You’ll be required to submit the following documents to verify the information that you provided on your application:
-Full Federal Tax Returns (last two years)
-W-2s (last two years)
-Recent pay stubs (30 days of consecutive earnings)
-Copy of Mortgage Statement
-Homeowners association info (if applicable)
-Homeowners insurance info (name, agent, phone #)
-Copy of ID/Driver’s License
Once everything has been verified by the lender, they’ll provide you with a loan estimate, set up an appraisal, and get your loan cleared-to-close. During this time, you’ll be reviewing and signing a lot of documents to prepare for closing day. Make sure you review each one thoroughly – if you find any discrepancies – have your lender resolve them.
At the closing table – you’ll be signing documents that outline the responsibilities of homeownership, pledge your home as collateral for the loan, state the consequences if you fail to make payments, escrow (taxes and insurance) disclosures, and a right to cancel form. These documents all have formal names, but your loan officer will discuss them with you when the time comes.
With all the documents signed, your loan will be funded in three business days. The refinance process can be quick and easy with the help of Neighborhood Loans. We know the City of Chicago like the back of our hand and can help you with any of your questions or home buying needs. Reach out to us today or fill out an application online to get started.
Frequently Asked Questions about Refinancing in Chicago
What are the current refinance rates in Illinois?
Interest rates will always be changing based on the state of the economy, but the rate you receive will come down to your personal financial situation. Right now, if you want a 30-year-fixed mortgage, make a 20% down payment, and have an above-average credit score, you could expect a rate of roughly 3%. It could be higher or lower, but it will vary based on your financials and the lender you choose to work with.
When Should I Refinance My Mortgage?
Refinancing your mortgage at the right time can be tricky. With constantly changing rates, locking in at the right time can be difficult. Depending on why you’re refinancing (see common reasons to refinance above) the right time could be when you’re ready. Regardless of the reason for your refinance, keeping an open dialogue with your loan officer will allow you to refinance at the best time possible.
Does Refinancing Hurt Your Credit Score?
This is a common myth when it comes to refinancing. When taking on new debt, your credit score may be impacted a little bit – but will hardly be noticeable and restore itself shortly after you start making monthly payments again.
Should You Refinance Your Home If You Plan on Moving?
Simply put, it wouldn’t make sense to refinance your home if you were planning on moving soon. Even if you’d save money over the next couple of years before the move, the costs of a refinance would most likely offset them.
Are There Closing Costs During a Refinance
The straightforward answer – yes. But when working with your lender, they should make sure and show you that refinancing will save you money over the course of the new mortgage terms. On average, a refinance could cost a couple thousand dollars depending on the price of your home.
How Often Can You Refinance?
If it makes financial sense to refinance, that it could be worth your while. There isn’t a limit to the number of times you can refinance – but remember there are cost associated with refinancing and you’re essentially restarting and taking on new loan terms with each refinance. If you’re taking cash out, you may have to wait a certain amount of time before taking out more equity again. Each situation is different and it’s important to communicate with your lender and lay out a plan that is beneficial to you.
Can You Get Denied for a Refinance?
There are a few reasons why a lender might deny your application for a refinance. Just like a purchase application – if your credit score and history are problematic, there is a chance you get denied. If you’re late on payments or aren’t consistent – a lender might require further explanation as to why before approving you. They might also deny your application if refinancing isn’t beneficial to you.
Can You Negotiate Finance Rates?
Many people might not be aware of this – but you can negotiate your rate with a lender if you aren’t interested in shopping around. When purchasing a home, you can change your rate with mortgage or discount points. But with a refinance, you’ll have to prove that you are willing to go above and beyond to make sure your mortgage is paid on time each month.
What are the Downsides of Refinancing?
The one main downside to refinancing is that there are costs associated with it. But when working with a lender you trust, they’ll do everything in their power to save you the most money possible. Depending on the type of refinance program you secure, you could be making payments for a longer period at a lower rate. For example, if you have 25 years left on your mortgage, you may have to restart at a longer (30 year) term. Some homeowners refinance to shorten their term – this will increase monthly payments but save you money on interest and help you pay off your home faster.
Overall – you will know if refinancing is right for you after going over financials with your lender. Reach out to Neighborhood Loans with any additional refinancing questions you have!