Tips for the Home Loan Refinance Process
By Amber Hunt
With mortgage rates being at historic lows, many people are thinking about refinancing. I am one of those people. I purchased my first home in December 2008 and have a 6.25% interest rate. At the time I’m writing this, 30-year fixed rates are near 4.500% (4.702% APR). Refinancing to this lower rate will save me approximately $300/month. If you’re in the same boat, here are some things you should know about the entire refinance process.
Before You Refinance
Know your credit score – Most conventional loans require you have good credit. While there are loans like the FHA loan that allow borrowers to have less-than-perfect credit, it’s always a good idea to know your exact credit score before you start the refinance process. Learn about how credit scores work, fix errors on your credit report and avoid credit mistakes to increase your chances of getting approved for your ideal loan.
- Be sure refinancing makes sense – Evaluate your situation. How long are you planning on being in your home? Do you want to pay off your mortgage quickly or change your loan type? Are you trying to get cash out of your home to make improvements or pay off other debts? Does your current loan have a prepayment penalty? Taking a close look at your financial and housing goals over the next 5-10 years will help you determine if now is the right time for you to refinance.
- Make sure you can refinance – As mentioned above, most loans require good credit, however if your credit score is below 720, there are additional options for you to choose from, such as the FHA or VA loan (if you’re a veteran). Closing costs also factor into the equation. Do you have money to bring to closing, or are you hoping to roll your closing costs into your new mortgage? A general guideline to follow is that you’ll need to bring 2% of the home’s purchase price to the closing, so see if you have that much money available.
During the Refinancing Process
- Ready your house for the appraisal – This is especially true in today’s market. If you’re not doing an FHA/VA streamline refinance, an appraisal will be required. Make sure you house is in the best shape possible. Make sure all updates and maintenance are completed in both the interior and exterior of your home. Treat the appraisal as if you were listing your house for sale. Do everything you can to ensure the house will appraise for top dollar.
- Do your homework – Be fully informed about home values in your area. If there are houses for sale on your street, find out what their list price is. Use sites like zillow.com to get an idea of property values in your surrounding area. This way, if an appraisal comes back lower than you expected, you will have already completed the necessary research and will be ready to present your case to the lender.
- Work with a reputable lender – Ask your friends and family who they’ve worked with in the past and if they’d recommend them to you. Make sure the lender you’re working with is responsive, helpful and ready to answer any questions you have about the process. The lender should ease the refinance process for you, not complicate it or leave you waiting for answers.
After you’ve refinanced
- Continue meeting your financial goals – If you’ve refinanced into a 30-year mortgage but want to pay it off sooner, budget to make an additional payment. Be sure to be aware of any prepayment penalties that may be associated with your loan (most legitimate lenders will not charge you these extraneous fees). Use the money you are saving each month wisely.
- Develop a debt management plan – This is ideally done before you refinance, but it’s a good idea to revisit your plan again once you’ve established a new loan.
Typically, when home owners make the decision to refinance, it’s to take advantage of lower interest rates to lower your monthly payment. Whatever your reasons are for refinancing, make sure that you are fully aware of the entire process before you get started. Utilize refinance calculators to get a good estimate of what your savings and expenses will be. And most importantly, work with a trustworthy and efficient lender to make sure the process goes smoothly.
Amber Hunt is an experienced personal finance writer with a knack for taking complex money issues and making them clear and simple. By day, she’s a home loan expert at Quicken Loans, America’s #1 online lender, where she specializes in writing about mortgages and helping people with the FHA streamline refinance and VA loans.