Refinancing Tips


Refinance Tips

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.

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.

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.

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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

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.

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.

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

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.

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.