When interest rates are low, it seems like everyone is refinancing their home. If you’re already a homeowner, refinancing can be a great way to lower your monthly payment, make home repairs, or pay off your mortgage faster. Here are 7 things to know about refinancing.
When you refinance your home, you’re replacing your original mortgage with a new one. Oftentimes, the new mortgage will have a lower rate or term than your previous one, and in some cases that’s required. In some ways, refinancing can be easier than buying a property since you’ve already bought your home, but has its own unique considerations.
Just like when you were buying your home, your credit score will be a significant factor when you decide to refinance. It’s best to have a have a credit score within a healthy range, though credit requirements will vary depending on your lender and the loan program you choose. Take steps to improve your credit score so you can be in the best position when you refinance. Your lender will also look at your debt-to-income ratio, or DTI. The lower your DTI, the more reliable you’ll appear to lenders since your debts don’t exceed your pre-tax income. A DTI at or under 36% is generally favorable, but the requirement will differ between lenders. Paying down large debts can help you reduce your DTI in preparation for a refinance.
Refinancing is attractive for people who are already homeowners, but not everyone refinances for the same reason. Some common refinance goals include changing the loan’s rate and term or getting rid of PMI. The refinance process will vary depending on what your objective is, so knowing what you want out of your refinance will help you prepare accordingly.
Collecting all the needed documentation for a refinance can be tedious and time consuming, so having an understanding on what to provide can make your refinance smoother. To verify income and employment, bring the last 2 months of pay stubs and 2 years of tax returns/W-2s to show your lender. Note that Social Security payments, pensions, disability, alimony, and child support are considered sources of income. You’ll also need to bring statements outlining all your assets and debts. Don’t forget to show proof of home insurance, as most lenders require that you have it when refinancing. Be sure to stay in close contact with lender in case there are other documents you need to provide or explain.
One of the most common questions homeowners have about refinancing is. “Is it worth it?” Although each situation is different, calculating your break-even point can help answer this question. The break-even point is when you begin to save money after the refinance. You can calculate the break-even point using a calculator, or by dividing the total cost of your refinance by your monthly savings to get the number of months needed to recoup your money. You should also consider how long you plan to stay in your home. For example, if you’re thinking of moving in the near future, refinancing might not make much sense. After you have an estimate of your break-even point, consult with your lender. Nothing beats meeting with a Loan Originator (virtually or in-person) to discuss the best refinance plan for you.
Even though refinancing can save you money in the long run, there are still some immediate expenses to consider during the process. Closing costs aren’t just for buying a home, they’re part of refinancing, too. Closing costs can include an appraisal fee (if you have one), origination fee, title fee, and the lender’s attorney. You can expect 2-5% of your refinancing costs to go towards closing, so be sure you have enough money to account for them. Your lender may allow you to have a no-costs closing where the closing costs are rolled into your refinance. In a no-costs closing, your closing fees are either added to the principal or exchanged for a higher interest rate.
Locking in an interest rate is a smart move, especially when you’re refinancing. If you come across a low rate, locking it will prevent it from fluctuating, potentially saving you a lot of money as you pay off your refinance. If you want to lock your rate but are concerned about missing out on an even lower rate, ask your lender if a float-down option is available. When current rates are low, you don’t want to miss the opportunity to protect it.
A home appraisal helps your lender know your home’s current value and informs them how much they are reasonably able to loan you. An appraiser from a third party will visit your home and make note of its condition, along with comparative data from your local area. Then, they send a report to your lender who will consider the information when processing your application.
COVID-19 has caused many home appraisals to be done with software instead of physical visits, but you should still be prepared to have your home appraised. If you’re having a virtual appraisal, treat it like you would an in-person appointment. Take time to do some cleaning, repair and replace fixtures as needed, and tidy up your yard to give it curb appeal. Some lenders may be willing to offer an appraisal waiver; it doesn’t hurt to ask if it’s an option.
Much like applying for a mortgage, there is no one-size-fits-all way to refinance. Knowing your reason for refinancing and getting in shape financially will help you have a successful and smooth refinance experience.
If you have any questions about refinancing your home, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying or refinancing process, click here to get started!
*NFM Lending is not a credit repair company. Please contact a credit repair company for more information on how to improve your credit score. Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.