How To Have A Smooth Refinancing Process
Refinancing doesn’t have to be complex. Here’s how to get started.
Know Your Credit Score
Do you have a rough idea of what your credit score is? It’s a good idea to know your exact FICO® Score before you apply for a refinance. Your credit score plays a very important role when determining how much you’ll pay in interest and what loan types you can qualify for. You can find your credit score by looking at your credit reports.
There are three major reporting bureaus that issue credit reports and scores: Experian, TransUnion and Equifax. Contrary to popular belief, your credit reports aren’t identical. Companies you have loans or credit cards with may not report to all three bureaus, which can affect your scores. Check each of your credit reports before you apply for a refinance and make sure there are no mistakes. Mistakes can lower your score and hurt your chances of a refinance. Be sure to immediately report any mistakes to each credit bureau.
You may want to focus on improving your credit score before you refinance, particularly if it’s on the lower end of the spectrum. Pay all your bills on time, keep your spending under control and work to reduce your debt so your credit score increases over time.
Understand Your Equity
You need to know how much equity you currently have in your property if you want to take a cash-out refinance. Equity is the percentage of your home that you’ve paid off and own free and clear. You build equity every time you make a payment on your mortgage loan because you pay down some of your principal balance. You can take some of this equity in cash when you choose a cash-out refinance. Many homeowners choose cash-out refinances when they need to pay down debt or cover repair costs because mortgage interest rates are lower than other types of debt.
Most lenders won’t loan you 100% of your equity with a refinance. Expect to be able to borrow 80% – 90% of your home equity maximum. This is why it’s important to know how much money you need before you apply and that your equity can cover it.
Not sure how much equity you have in your home? Request a mortgage statement from your lender so you know how much of your principal balance you’ve paid off.
Don’t Forget About Closing Costs
You must pay closing costs before you finalize your refinance, just like when you take out a mortgage loan. The specific closing costs you’ll pay depend on where you live, but some common fees you might see include:
- Application fee: Your lender might require you to pay an application fee when you submit a request for a refinance. You must pay this fee whether you get approved to refinance your loan or not.
- Appraisal fee: Your lender will require an appraisal before you get a refinance. Appraisals assure the lender that your property value hasn’t gone down since you bought the home and also ensures that they aren’t loaning you more money than your home is actually worth.
- Inspection fee: You must have a special inspection in some states (like a pest inspection) before you close on a refinance. You might also have to get an inspection before you qualify for certain types of government loans.
- Attorney review and closing fee: An attorney must review your refinance documents before closing in some states.
- Title search and insurance: You may need to pay for another title search if you refinance with a new lender that didn’t service your old loan. You may also have to pay for title insurance again, which protects you and your lender against other claims to the property.
You can expect closing costs to be equal to around 2 – 5% of your loan’s principal balance. Make sure you can pay these costs before you apply for a refinance.
Your lender might offer you a refinance without closing costs if you can’t afford to pay those expenses. Your lender waives your immediate closing costs but you’ll need to take on a higher interest rate in exchange for this convenience.
Closing costs can be $4,000 – $6,000 on a $200,000 refinance, so a no-closing-cost refinance might seem like a great deal. But it’s important to know that you’ll usually end up paying more than this over the course of your loan.
Let’s look at an example. Say you want to refinance a $150,000 loan with a 30-year term and a 3.5% APR. You’re also required to pay $4,500 for your closing costs upfront. Your lender also offers you a no-closing-cost refinance with $0 in closing costs but a 4% APR. You’ll pay $92,484.15 in interest over the course of your loan if you pay your closing costs upfront.
On the other hand, you pay a total of $107,804.26 in interest by the time your loan matures if you take the no-closing-cost refinance. Just a half percentage point of difference causes you to pay over $10,000 more for your loan than you would if you paid your closing costs upfront.
Be sure to do the math and see how much extra you’ll pay before you take a no-closing-cost refinance.
Make Upgrades Easy To Find
Your lender will order an appraisal to make sure that your home's value matches up with your new loan. One of the factors that influences the value of your property is the type of upgrades you’ve added to your home since you bought it. Certain upgrades might be a bit difficult for an appraiser to spot on their own.
Be present for your appraisal and give your appraiser a list of all permanent upgrades you’ve made to your property. Include receipts from contractors, as well as estimates and permits – if applicable. Don’t be afraid to walk through your home with your appraiser and point out all the additions you’ve made. This will help increase the overall value of your property.
Set Yourself Up For Appraisal Success
Your appraiser will assign an estimated property value to your home during your appraisal. The best-case scenario is that your appraiser assigns your home a value that’s higher than what you paid for the home. You may need to adjust the amount you’re asking for in a refinance If your appraisal comes back low.
Here are a few things you can do to improve your chances of a successful appraisal:
- Do your research. Property values in your area play into the amount your home is worth. Research local properties similar to yours and present a recent list of sales to your appraiser. This will make it easier for your appraiser to see how property values are trending in your area.
- Spruce up your exterior. Your home’s curb appeal can influence its overall value. Take a few steps to make your property look great right before your appraisal. Mow your lawn, do some gardening and stow any children’s toys before the big day.
- Make your home as comfortable as possible. Make sure your home feels comfortable – it can influence your appraiser’s assessment. Do some light cleaning, make sure pets are out of the way and set your thermostat to a reasonable temperature.
Respond To Lender Inquiries Quickly
Most refinances take 30 – 45 days. You can ensure that your refinance goes through quickly and smoothly by responding to any inquiries from your lender as soon as possible. Your lender might ask for additional documentation supporting your credit, work or financial history during underwriting. Try to send these documents to the lender within a few days of their request and include your contact information in case they have any more inquiries.
When your lender finishes underwriting your loan and reviewing your appraisal, they’ll send you a document called a Closing Disclosure. Your Closing Disclosure includes the final terms of your loan, your closing costs, your interest rate and more. Your lender must give you at least 3 days to review your Disclosure after you receive it. Be sure to acknowledge that you have your Closing Disclosure as soon as you get it.
There are some steps that you can take to ensure you set yourself up for a refinance that goes off without a hitch. First, be aware of your financial situation, know your credit score, and have an understanding of the amount of equity you have in your home. This will help you find the right refinancing solution.
Be sure that you can cover closing costs before you begin your refinance. Did your lender offer you a refinance with no closing costs? Do the math and see how much more expensive your loan will be before you agree. Remember to acknowledge your Closing Disclosure and respond to all lender inquiries quickly. Finally, set yourself up for a successful appraisal: Improve your home’s condition and make upgrades easier to spot.
See What You Qualify For
Breaking Down The Costs To Refinance Your Mortgage
February 19, 2021
Ready to refinance? Learn all about the costs of refinancing, including application, appraisal, attorney and others fees before you apply.
Refinancing Your Mortgage: Requirements Explained
Refinancing - 5-minute read
January 20, 2021
Refinancing can let you borrow on your home’s equity, get rid of mortgage insurance, shrink your payments or shorten the term of your loan. Read on to make sure you have everything you need to get started.
Refinancing For Home Improvements: A Guide
Refinancing - 5-minute read
January 21, 2021
Refinancing is a low-interest way to get tax-free cash for remodeling your kitchen, finishing your basement – or anything you choose. Let’s look at how you can refinance your mortgage to fund your project.