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Mortgage Refinance Tips: 8 Steps to Success
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A mortgage refinance allows you to replace your current home loan with one that gives you more advantages. Refinancing typically lowers your interest rate and/or your monthly payments. A cash-out refinance could also allow you to tap home equity to pay off credit cards or make home improvements.
The following refinance tips can help you navigate the refinance process and choose the best option for your financial goals.
- Check your credit score and DTI ratio
- Look at your equity
- Decide on a refinance goal
- Estimate the costs
- Go rate shopping
- Prepare for a home appraisal
- Lock in your mortgage rate
- Respond quickly to lender inquiries
1. Check your credit score and DTI ratio
Check your credit score to see if it needs work or if you’re good to go. Experian considers credit scores of 740 and higher as “very good” to “exceptional,” though the minimum required score for most mortgage lenders is 620. Still, there are some government-backed mortgage programs that have a lower minimum — for example, FHA loans require a 500 score.
Your debt-to-income (DTI) ratio shows how much debt you pay monthly compared to how much you make monthly, before taxes. If you spend 43% or less of your income on debt payments, you can likely afford to take on another debt payment. Here’s how to calculate your DTI.
2. Look at your equity
The amount of equity you have in your home can be a major factor in whether you’re approved for a refinance and in determining your refinance interest rate. Your equity is a part of your loan-to-value (LTV) ratio, which shows how much you’re borrowing compared to how much the home is worth. Generally, the lower your LTV, the better.
To estimate your equity, look at your current mortgage to see the remaining balance on the loan. Subtract that number from your home’s current value.
There are a couple of exceptions — in VA IRRRL, FHA streamline and USDA streamline refinance programs, the lenders don’t consider your LTV.
3. Decide on a refinance goal
There are many benefits of refinancing; be clear on your financial objective(s) so you have a clear path. You could focus on:
Lowering your monthly payments. There are many ways to lower your mortgage payment, including reducing your interest rate, selecting a longer repayment term and making a large principal payment before you refinance.
Taking cash out. Getting cash out when you refinance can be a cost-efficient way to borrow money. Average mortgage rates are significantly lower than the rates on most other loan products, including personal loans and credit cards. Here’s a cash-out refinance calculator to help you crunch the numbers.
Lowering your interest rate. If you’ve been making money moves since you first closed on your mortgage and/or mortgage rates are down nationally, you could qualify for a better mortgage interest rate. Things that could help you qualify for a lower rate include an improved credit score, more income, lower debt and a new cosigner who has good credit and/or a good DTI ratio. You can compare rates on LendingTree.
Paying less in interest overall. You could aim to refinance for both a lower rate and a shorter term. Shorter-term mortgages that last for 10, 15 and 20 years typically have lower rates than 30-year mortgages. And, because the lower interest rate applies to a shorter loan period, the interest savings can be substantial.
Eliminating private mortgage insurance (PMI). Most mortgage lenders require that you pay for PMI until you build 20% equity in your home. If your home’s value has appreciated and you’ve been paying the mortgage for a while, the price appreciation and equity you’ve built might be enough to put your ownership stake at 20% when you refinance.
4. Estimate the costs
To see if a mortgage refinance will be financially worth it, calculate your breakeven point.
Mortgage lenders typically charge upfront fees to cover their costs of issuing the loan to you. These closing costs can range from 2% to 6% of the new loan amount. Here are some common mortgage refinance fees:
- Application fee: $75 to $500
- Origination fee: up to 1.5% of the loan amount
- Credit report fee: $$30 to $50
- Home appraisal fee: $300 to $400
- Home inspection fee: $300 to $500
- Flood certification fee: $15 to $25
- Title search and insurance fee: $400 to $900
- Recording fee: $25 to $250
- Reconveyance fee: $50 to $65
Some lenders offer no-closing-cost refinancing, which could be an option if you don’t have enough cash to cover the fees up front. In these loans, the lender still charges closing costs, but either rolls them into the loan — increasing your amount borrowed — or charges you a higher interest rate. Be aware that both of these options are likely to be more expensive than paying the costs out of pocket.
5. Go rate shopping
See what lenders advertise for their mortgage refinance rates and choose a few finalists to apply to. Get at least three quotes so you can compare offers. Your credit score won’t be dinged by applying to several lenders any more than it is when you apply to one, if you do all the applications within a 14-day window. The three largest consumer credit agencies allow this two-week time period so that consumers can rate shop.
6. Prepare for a home appraisal
Since your home is the collateral for the mortgage loan, most refinance lenders require a home appraisal. An appraisal is a certified professional’s opinion of your home’s value. How much your home is appraised for can strongly impact your refinance offer.
To present your home in the best light it’s a good idea to:
- Be present during the appraisal to answer questions
- Provide receipts and documents for any upgrades and renovations
- Tidy up the interior of your home and remove clutter
- Spruce up your yard so your home has curb appeal
7. Lock in your mortgage rate
Rates are expected to go up several times this year as the Federal Reserve fights inflation. Locking in your refinance rate as soon as possible can mean that your quoted interest rate doesn’t rise even when national rates do.
8. Respond quickly to lender inquiries
Requests from loan officers aren’t spam — they’re vital to the processing of your loan. Respond as quickly as possible to lender inquiries with any requested documents, so the process goes smoothly and you can quickly close on your mortgage refinance.
Frequently asked questions
What should you not do when refinancing?
Many of the homebuying mistakes that you should avoid apply to the refinancing process. You should not:
- Get only one quote
- Change jobs suddenly
- Make any large purchases that put you in debt
- Ignore the loan officer’s inquiries
How do I get the most out of my mortgage refinance?
To get the most out of your mortgage refinance, you should improve your credit score, shop for mortgage rates with multiple lenders, compare different loan terms and consider buying mortgage points.
When should you decide to refinance your mortgage?
The rule of thumb is that if you can reduce your interest rate by at least 1%, it could be worth it to refinance. Another good reason is if you could remove PMI by refinancing.
Is it worth it to refinance your home for 1%?
It may be worth refinancing if you can reduce your mortgage interest rate by 1% or more. Use a mortgage calculator and find your breakeven point to be sure.
Do you need an attorney to refinance?
Some states require that you have a real estate attorney when you close on a mortgage loan. At the same time, some borrowers may appreciate the peace of mind they get from hiring one even if the state doesn’t require it.
Does refinancing hurt your credit?
Any time you apply for a loan and a lender does a hard credit pull, your credit score will temporarily dip. Still, remember that it doesn’t hurt your credit score to apply with several lenders any more than it does to apply to one — as long as you complete all the applications within a 14-day window.
How much does it cost to refinance your house?
Closing costs can range from 2% to 6% of the loan amount on average. According to the Consumer Financial Protection Bureau, it’s illegal for lenders to purposefully understate your closing costs on your loan estimate.
What credit score do you need to refinance your mortgage?
Generally, the higher your credit score, the better. Conventional loans require borrowers to have a minimum 620 credit score, while FHA loans require a 500 score. VA and USDA loans technically don’t have a minimum, but lenders typically require scores at or above 620 and 640, respectively.
Can I refinance with the same bank?
If your bank allows it, yes, you could refinance with your current mortgage lender. You should still get a couple quotes from other lenders to make sure you’re getting the best mortgage refinance deal.
How quickly can I refinance a mortgage?
There is no set minimum time for conventional loans. However, most people wait a few years — and you may want to wait until you’ve built enough equity to refinance without paying for PMI.
How long does it take to refinance a mortgage?
The amount of time it takes to refinance a house varies, but it typically takes about 45 days.
How much equity do I need to refinance?
You’ll need to have a minimum of 20% equity to refinance and not pay PMI. However, you could refinance with less equity — some loans like VA and USDA mortgages require 0% equity. You’ll need at least 20% equity to do a cash-out refinance on a conventional or FHA loan; only 10% equity is required for a VA cash-out refinance.
Can I buy a car while refinancing?
It’s smart to avoid any major purchases while your home refinance paperwork is being processed. If you add significant auto debt to your credit profile before your paperwork is signed, it could throw off your DTI ratio.