Top Tips to Refinance Existing Home Loan
What You'll Learn: What You Need to Know Before You Apply for a Mortgage Refinance
EXPECTED READ TIME: 9 MINUTES
December 31, 2021
Refinancing an existing home loan can be a great way to save money or put your home equity to good use. Although interest rates are at historical lows, not everyone is eligible for the absolute lowest rates and terms when refinancing. Learning how to maximize your chances of securing the best refinance terms before applying for a new mortgage will help you save the most money. Read on to discover more.
Four Helpful Refinance Application Tips
#1 Maximize Your Credit Score
Your credit score determines whether you qualify for a new mortgage and what your rate and terms are. Before you apply to refinance, pull your credit, and take care of any negative information such as late payments, overextended credit (outstanding credit higher than 30% of your credit line), inaccurate information, collections, or other negative information.
It’s important to refinance while the rates are good. So, fix what you can, but the goal isn’t perfection. Taking a look at your credit and being proactive may help increase your credit score and your chances of approval.
#2 Stabilize Your Income and Employment
Government loans such as FHA and VA can be more lenient than conventional guidelines with debt-to-income limits. But the more stable your income and work history are, the better terms you’ll get.
Try to wait until you have a 2-year stable employment and income history before applying for a refinance for the best terms.
#3 Preparing Your Home Can Help Home Equity
Home equity is the difference between your home’s value and your outstanding mortgage. Higher equity reflects in your loan to value. More equity increases your chances of securing the best rate and terms on your mortgage.
How well your home shows and whether it’s in good repair can affect the appraisal. If it’s unkept with obvious deferred maintenance, don’t expect the best results.
On the other hand, getting your house prepared for an upcoming appraisal is worth the work! Clean up the yard, mow the lawn, and add potted plants on the front porch for instant curb appeal. Have the interior look its best by cleaning and decluttering.
Although sometimes appraisals can be done via an automated online service, it’s best to prepare in case you have an actual inspection.
#4 Lower Your Debts if Possible
You’ll get the best offers if you have limited debts when applying for a refinance. Lenders look for a low debt-to-income ratio because it decreases your risk of default. Expenses included in your DTI include your mortgage (principal, interest, real estate taxes, home insurance), credit card minimum payments, car loans, student loans, and personal loan payments.
If you have a loan or credit card, you can easily pay off or pay down, consider doing so. That could help your DTI and your credit score.
What Affects Refinance Interest?
Chances are, you want to refinance to lower your interest rate. Even if you’re refinancing for other purposes, such as to use your home’s equity, the interest rate determines how much you can afford and what the monthly payments are.
To get the lowest refinance interest rate, you must show you are a good credit risk. Just like the tips we spoke about above, when applying for a refinance, you want to prove you have what it takes to afford the new loan and are a good risk for the lender.
Borrowers with high credit scores, low debt-to-income ratios, and low loan-to-value ratios get the best interest rates.
That doesn’t mean you can’t apply for a refinance with a higher LTV or lower credit score. If that’s the case, find ways to ‘compensate’ for the risky factors. For example, if you have a lower credit score but have a low debt-to-income ratio and LTV, you may still be a good candidate for a refinance.
Tips to Getting a Low-Cost Home Refinance
So, how do you get a good deal on a refinance? Try these tips.
Make Your Mortgage Payments on Time
Lenders first look at your housing history. If you can’t pay your current mortgage on time, you won’t be approved for a new loan. A timely mortgage payment history speaks volumes.
Keep Your Debts Low
Lenders prefer borrowers without a lot of outstanding credit. Keep your debts as low as possible, with no more than 30% of any credit line outstanding when you apply to refinance.
Shop Around for the Best Rate
No two lenders offer the same interest rate and lender fees. Shop around and see what mortgage lenders and credit unions offer. Credit unions may have the most attractive rates and terms because they are not-for-profit and pass the savings onto their members.
Cover Your Closing Costs
Some lenders offer no-closing cost refinances, but that could mean they’ll charge you a higher interest rate to cover those costs. Or the costs could roll into your loan, which will raise your principal. When you pay for your closing costs out of your pocket, you won’t be increasing your principal, and you’ll get the lowest rate.
How much Savings is Worth Refinancing?
Everyone assumes it makes sense to refinance when rates fall. But that’s not always the case. Not every homeowner benefits from refinancing. Here’s how to tell if it’s right for you.
Figure out how much you’ll save monthly by refinancing. For example, if you’re lowering the interest rate, what’s your new payment, and how does it compare to your current payment?
Next, look at the total closing costs. Most loans have closing costs, including origination, processing, underwriting, and closing fees. These are costs you pay out of pocket when you close on the loan and take away from the savings.
To determine if refinancing makes sense, use the following calculation:
Total closing costs/Monthly savings= months to recoup the closing costs.
For example, if it costs $5,000 to close on a loan and you’ll save $150 a month on your payment, it will take you 33 months to recoup the closing costs. If you know, you’ll move in three years, refinancing doesn’t make sense. But, if you have long-term plans to stay in the home, you’ll enjoy the savings after 33 months.
Know When to Refinance your Existing Home Loan
Refinancing your existing home loan may be an excellent way to save money if all the cards fall in the right place. Don’t assume because interest rates fell that you should take the first refinance offer you find.
Do your research, compare your options, and know when and if it makes sense for you to refinance. While saving money on your mortgage payment can feel like a huge relief, if it costs you more money in closing costs than your savings, it’s best to shop around. Find the best deal from a credit union or lender that will offer lower fees.