Are you looking to refinance your home loan? There are lots of reasons why you may want to get another deal on your mortgage.
No matter why you want to refinance, you’ll need to put the legwork in and find the best refinance deal for you. How can you ensure you’re getting the right loan?
These tips will help you along the refinance process. Follow this advice and talk to a lender or broker, and you’ll have everything you need to get started.
Table of Contents
1. Do Your Prep Work
The very first thing you should do, when considering home refinance, is to do your homework. The more informed you are, the better deal you can get.
Firstly, consider why you want to refinance your home. There are several reasons why you may want to do this:
- Lowering your interest rate or monthly payment: This is the most common goal for most homeowners. They want to take advantage of better interest rates or pay less on the loan every month.
- Pay the loan off faster: Do you want to get the loan paid off more quickly, with a shorter term? Refinancing can help you do that.
- Switching interest types: There are two main types of interest on home loans, either fixed-rate or adjustable-rate loans. You may want to change from one to the other.
- Decrease mortgage insurance payments: If you’re paying mortgage insurance premiums or MIPs, then refinancing can help you do this. This usually happens if you switch from an FHA loan to a conventional loan.
- Borrowing against your home equity: Some want to borrow against their home equity. There are many reasons for doing this, such as for debt consolidation or home improvements.
These are all good reasons to refinance, but remember there are times when it isn’t actually the best option. Make sure that you aren’t considering refinancing for the wrong reasons.
For example, if you can’t afford the closing costs, then it’s not going to make sense to refinance. If there’s a long break-even period in the new home loan, you won’t be able to take advantage of any lower rates.
Be aware of this, before you go into refinancing your loan.
Check out your home equity
Now you know why you want to refinance, you’ll need to investigate the equity you have in your home. This is the difference between your home’s value and the amount that you still owe on the mortgage.
When you come to apply for refinancing, an expert will be sent to reappraise your home. However, you do want to have an idea of equity before you get started.
If you want to know your equity, there are several home equity estimation services online. Use these to give yourself a rough estimate of your equity.
Remember that in most cases, you do need equity in order to get refinancing. Some loans though, such as some FHA loans, don’t, so keep that in mind.
The amount of equity you have will affect what you can get, too. You’ll need more equity for cash-out refinancing, for example.
Decide on the type of refinance you need
You’ll need to know what kind of refinancing you’re looking for when you come to apply. Now you have the above information though, it’s easy to work this out.
There are four different refinance purposes that you can apply for:
- Rate-and-term: This is for reducing interest rates, or building equity faster with a shorter term.
- Cash-out: This is for tapping into your equity in order to borrow cash.
- Limited cash out: This helps reduce payments, and getting smaller cash sums up to $2,000 in loans.
- Streamline: This will help lower payments on FHA loans, avoid income verification, and skip home appraisals.
2. Gather Up All Relevant Data
Now you have all the prep work done, you need to start gathering the data you’ll need in order to refinance your home loan. There are several things you’ll need to have before you start applying:
Check your credit score
Your credit score is vital during this process, just as it was when you were applying for the home loan initially. You’ll need to meet a minimum credit score, in order to be abler to refinance.
The best credit score to have is anything above 740. That will get you the best rates, and help you find the most competitive deals.
You don’t need to have a credit score that high in order to refinance, though. If you’re in the market for an FHA refinance, it can be as low as 580.
For conventional refinancing, your credit score needs to be a minimum of 620. This is the same if you’re looking at a VA refinance, although the VA itself doesn’t specify a minimum score itself.
For a USDA refinance, you’ll need a credit score of at least 640.
If your credit score isn’t where you would like it to be, you can take some time to improve it by paying off debts and taking part in other credit improving activities. However, if you want to refinance in the near future this may not be an option.
Check your LTV ratio
Your LTVB ratio is your loan to value ratio and measures how much of your home’s value you’re borrowing. The lower your rate is, the lower your interest rate.
You can calculate your rate by dividing the new loan amount by the home’s value. This will give you the LTV ratio expressed as a percentage.
Check your DTI ratio
Your DTI ratio is your debt to income ratio. This was first calculated when you first took out the loan and was part of the decision of whether to give you the loan.
You’ll be aiming to keep the DTI ratio at 45% or lower. If you can do that, you’ll be able to get the best deal on your refinance.
Get your paperwork together
The last thing you need to do, before applying for your refinance loan, is to get the right paperwork together. Just as you did when you first got your loan, you’ll need the right paperwork to back up your application.
Find the following and gather it together, ready for your application:
- Bank statements from the last 60 days
- Pay stubs for the last 30 days
- W-2s for the past two years
- Recent contact numbers for any employers you’ve had in the last two years
- Retirement statements
- Documentation of any other sources of income, such as alimony or child support
- A copy of your home owner’s insurance policy
- A current monthly mortgage statement
Now you have everything together, you’ll be ready to move onto the next step.
3. Get Quotes And Prepare For A Home Appraisal
You have everything you need, so you’re ready to get a quote on your refinance. It should be easier to start looking, as you have all the info you need and know exactly what you’re looking for.
Shop around
It’s very tempting to go for the first offer you find, but it may not be the best deal out there. The internet has made it easier than ever to shop around, so make sure you’re taking advantage of that.
Experts recommend that you look for deals from at least three different lenders. If you want to go the extra mile, you can find offers from up to five different lenders, and start comparing what they can offer you.
As well as looking online, you can talk to family and friends to see what they can recommend to you. This is always a good idea, as they may have recommendations that you hadn’t even thought of.
Also, make sure you reach out to your current lender and ask them what they can offer you. Some lenders will be able to give you a good deal, so make sure you ask them.
Compare rates
When comparing rates, make sure you do the following:
- Check rates on the same day: Rates change daily, so compare all the rates you have on the same day, to get the best idea of what a lender can offer you.
- Compare lender fees: All lenders will have fees, such as origination fees, discount points, and more. See if one lender can be more competitive here.
Once you’ve found the lender that’s best for you, you can start the application process. When you do this, most of them will want to do a home appraisal.
Get a home appraisal
Home appraisals are done to check the home’s value and ensure that it’s worth it to refinance your loan. This is because your home is the collateral for this new loan.
Remember, if the home appraisal comes in too low, you may have to take some steps. This can include making up the difference in cash, paying a higher interest rate, or even cancel the refinance.
It’s usually best that you’re present during the home appraisal, as you can help present your home in the best light and get the most value on your refinancing. You’ll be able to answer any questions the appraiser has, so they can be more exact in valuing your home.
Ensure your home is neat and tidy, so they can see around without anything getting in the way. It also pays to clean up the yard, so the house looks good from the outside too.
Once this is done and you have the value of the home, then you’ll be ready to move onto the next step.
4. Start Planning For The Closing Process
You’ve applied for the loan, you’ve gone through the appraisal process, and now you’re ready to start closing on it. There are a few things you need to do before you close on that refinance loan.
Calculate your breakeven
The breakeven on your loan is the amount of time it will take to recoup the amount you paid to refinance the loan itself. For example, say you’ve paid $7,500 in refinance costs, in order to save $125 a month.
To find the breakeven point here, divide the costs by the savings per month. Here, that equation will be $7,500/$125 = 60.
In this scenario, it will take you 60 months to get to the point where you’ll break even. It’s important to make this calculation, as you need to know if it’s worth taking out that loan.
In this instance, if you were planning to stay in the home for more than 5 years, then it will work out to be a better deal. If not though, then you may want to look for another refinance plan.
Lock in the mortgage rate
Refinance rates change daily, and until you lock the rate in, it’s not guaranteed you’ll get it. That’s why it makes sense to lock it in early.
When you get a mortgage rate lock, this will hold that interest rate for you from anywhere from 30 to 60 days. This allows you to know just what your principal and interest rates are at closing.
Make sure you know exactly when the mortgage lock-in date expires. You want to keep track of it, because if you don’t complete it by then, you may need to pay an extension fee.
Start planning for closing
Closing on your new mortgage can take anywhere from 30 to 45 days, but it pays to start planning for it early. Also, it’s worth remembering that if you’re going through the process digitally, then the process could be faster.
Typically, you’ll receive a closing disclosure three business days before your signing date. This will contain all the figures, so you can check them over and be sure you’re happy with them.
Once you’ve signed, you have the right of rescission for three days afterward. If you don’t cancel in writing during those three days, the refinance will fund at midnight on the third day.
With these tips, you’re ready to find the best refinance home loan for you. Plan ahead, and you’ll get just what you’re looking for.
