10 Tips For Refinancing Your Mortgage
Refinancing can be a terrific option if you’re interested in changing the term of your mortgage, lowering the amount of your monthly payments or tapping into your home equity. Plus, refinancing may be able to help you achieve your financial goals, like paying off your mortgage sooner or consolidating debt.
The process for refinancing your mortgage will be similar to when you applied for a mortgage loan to purchase your house – and it will include basic steps like comparing mortgage lenders and paying for closing costs. However, a few aspects of the refi process aren’t so straightforward. Let’s walk through some tips for refinancing that’ll help make refinancing your home loan a bit easier than it would otherwise be.
10 Refinance Tips And Advice For Homeowners
Refinancing doesn’t have to be a difficult process. Consider the following 10 tips before applying for a mortgage refi.
1. Determine Your Refinance Goals
Before you decide whether to refinance, consider the goals you hope to reach with a new home loan. People typically refinance to do one or more of the following:
- Secure a lower interest rate
- Make mortgage payments more affordable
- Pay off a home loan sooner
- Utilize home equity to pay off debt or make some type of investment
Establishing your refinance goals at the start of your journey can also help inform other decisions, like choosing the length of your new loan term or the best type of mortgage refinance for your needs.
2. Decide On A Refinance Option
Once you’ve determined your goals with refinancing, you can explore the different types of refinances to find the one that best fits your personal and financial needs. Let’s take a look at a few refinancing options to see how they work and what they can offer eligible borrowers.
- Rate-and-term refinance: A rate-and-term refinance, also called a regular refinance, lets you replace your mortgage with a new one featuring different loan terms. This refinance option can help you reduce the amount of your monthly payment or pay off your loan quicker and end up paying less in interest. It can also help you switch loan types. So, for example, you might change from an adjustable-rate mortgage to a fixed-rate mortgage.
- Cash-out refinance: With a cash-out refinance, you can turn the equity you’ve built in your home into cash. This type of refinance replaces your mortgage with a loan equal to the principal balance you still owe, plus the amount you take out of your home equity. You can then use the lump sum of cash taken out to build a college or retirement fund, finance home repairs or consolidate debt.
- Cash-in refinance: If you’re looking to build equity in your home, you might consider a cash-in refinance. With this refinance option, you’re making a lump-sum payment onto your principal balance. A cash-in refinance could help you secure a lower interest rate and more favorable loan terms because your lender sees you as less of a risk.
- Streamline refinance: If you have a VA, FHA or USDA loan, you may qualify for a Streamline Refinance. While each loan type has a different version of a Streamline Refinance program (like an FHA Streamline Refinance and a VA IRRRL), the reasons for pursuing this method are similar to other refinance options: to change loan terms, lower monthly payments or achieve financial goals. A big upside of a Streamline Refinance is that a home appraisal shouldn’t be required since you already qualified for the loan type when you applied for your original mortgage.
- No-closing-cost refinance: A no-closing-cost refinance lets you roll your closing costs into your monthly mortgage payments. You may also have the option to exchange some of your upfront costs for a higher interest rate over the new loan term. While a no-closing-cost refinance doesn’t eliminate closing costs completely, it removes the pressure of having to make these payments when you close on your new mortgage.
- Reverse mortgage: A reverse mortgage may be a great option if you’re retired or approaching retirement. If you’re 62 years or older, a reverse mortgage can help you turn a portion of your home equity into cash.
3. Check Your Credit Score
Before you apply to refinance, it’s best to know your credit score. Your credit score shows mortgage lenders how capable you are of managing and paying off debt. The higher your credit score, the more attractive the interest rate you’ll secure when you apply to refinance.
While credit score requirements for loan refinance programs vary among lenders, borrowers should expect to need a FICO® Score of at least 620. If you need to boost your score before refinancing, try to limit spending and be mindful of your credit card payments.
4. Check Your Debt-To-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is a measurement of your total fixed monthly debts (like your mortgage, car or student loan payments) divided by your gross income for the month. This ratio is then converted into a percentage. Similar to your credit score, your DTI is a financial indicator for lenders because it shows how much money you’re devoting to debt payments every month.
In most cases, you’ll need a DTI of 45% or less to refinance, but this can vary by mortgage lender and loan type. Looking for ways to reduce your DTI before applying to refinance? Try to avoid taking on new debts and/or put together a plan to eliminate your outstanding debts.
5. Know How Much Home Equity You’ve Built
The amount of equity you’ve built in your home can also affect whether you’re approved for a mortgage refinance. Your home equity is the difference between your home’s value and the amount remaining on your principal mortgage balance. Now, let’s consider an example. If your home is worth $350,000 and your remaining loan balance is $200,000, you have $150,000 in home equity.
If you want to refinance to take cash out against your home equity, most lenders require you to keep a minimum of 20% equity in your home once the cash is taken out. However, a VA loan refinance allows you to take advantage of as much as 100% of your equity at once.
6. Understand The Costs Of Refinancing
Just like when you first got your mortgage, closing costs are part of a refinance because you’re taking out a new loan. Refinance costs that borrowers can expect to pay include:
- A loan application fee
- A loan origination fee
- A credit report fee
- Title insurance
- A home appraisal fee (if applicable to the loan type)
- Mortgage points (depending on the number of points and loan amount)
On top of paying closing costs, you’ll want to make sure you break even with a mortgage refinance. In other words, if refinancing will save you money when all is said and done, it might be worth paying the upfront fees and closing costs. Be sure to weigh the costs of refinancing with your long-term savings to determine whether a mortgage refinance is financially worth it.
7. Compare Interest Rates
Shop around and compare interest rates between lenders to not only find the one with the best terms but to save money over the lifetime of your new mortgage. If you’re ready to submit an application or two, make sure to carefully review your Loan Estimate paperwork from each lender.
This three-page document is typically issued by a lender within three business days of receiving your refinance application and includes the terms and conditions of your new loan, such as your projected monthly mortgage payments and closing cost details. If you submitted multiple refinance applications, the Loan Estimate can help you thoroughly review your options so you can choose the one with the best terms.
8. Organize Your Mortgage Paperwork
You’ll need to submit several important pieces of paperwork to your lender when you refinance, so it’s important to stay organized and be prepared. Documentation you’ll need to refinance may include:
- Tax returns
- W-2s or 1099s
- Pay stubs
- A copy of your homeowners insurance policy
- A recent mortgage statement
- Statements showing other debts
9. Prepare For A Home Appraisal
A home appraisal helps lenders understand how much your home is worth so they’re not loaning out more money than necessary. Not all loan types require an appraisal to refinance, but others do.
When performing the appraisal, appraisers look at the overall condition of your house (the interior and the exterior), the number of rooms, the home’s location, real estate comps in your area and any improvements you’ve made to your property along the way.
If you have to get an appraisal to refinance, here are some steps you can take to potentially land a higher appraisal:
- Declutter and organize the items in your house.
- Add fresh paint.
- Test your home’s major systems to ensure they’re functioning properly.
- Upgrade your curb appeal.
10. Get Ready To Close On Your New Loan
In the final stages of the refinance process, it’s important to keep all of your paperwork in order and be responsive to your lender’s questions. They might ask for additional information to verify your proof of income or credit history.
From the day you apply for a refinance loan, it can take anywhere from a few weeks to a month or two for a refinance to close. While external factors can prolong the process, staying organized from the start can lead to a seamless transition to your new mortgage.
The Bottom Line
Refinancing your mortgage can be a complex process, but there are several ways to help make it as painless as possible. Establishing your goals, understanding your refinance options, knowing where your qualifying factors stand and being organized are just a few refinancing tips worth considering. Keep these tips for refinancing in mind if you decide that going this route makes sense for your situation.
Are you ready to refinance your home loan? Apply for a mortgage refinance with help from our team today.