Mortgage Refinance Tips And Tricks
Victoria Araj8-minute read
July 04, 2022
When you refinance your mortgage, you’re replacing your current home loan with a new rate and term or different loan balance. Your old mortgage is paid off with the new loan, resulting in only the new mortgage payment.
Once you understand your mortgage refinance requirements, it’s time to learn the do’s and don’ts of mortgage refinancing. Let’s take a look at some simple mortgage refinance tips you can use when refinancing your house.
Consolidate debt with a cash-out refinance.
Your home equity could help you save money.
7 Tips And Tricks For Refinancing Your Mortgage
Refinancing doesn’t have to be complex. Here’s how to get started with some refinancing tips and tricks.
1. 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 in determining how much you’ll pay in interest and what loan types you can qualify for. Because refinancing requires a hard credit check, it may temporarily have a minor impact on your score. 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.
It’s important to check each of your credit reports before you apply for a refinance, to make sure there are no mistakes. Mistakes can lower your score and hurt your chances of qualifying for a refinance. Be sure to immediately report any mistakes to each credit bureau. If you find your credit score to be lower than anticipated, you should look into refinancing options for low credit scores.
You may want to focus on improving your credit score before you refinance, particularly if it’s on the lower end of the spectrum. Paying all your bills on time, keeping your spending under control and working to reduce your debt will increase your credit score over time.
2. Understand Your Equity
If you want to take a cash-out refinance, you first need to know how much equity you currently have in your property. Equity is the difference between what your home’s market value is and what you still owe. 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 want to refinance to pay down debt or cover repair costs, because mortgage interest rates are lower than other types of debt.
Most mortgage lenders won’t loan you 100% of your equity with a refinance. You should 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.
3. 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 ensure 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: In some states, an attorney may be required to review your refinance documents before closing. If you have to hire a real estate attorney, they’ll charge their own fees.
- 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 equal around 3 – 6% of your purchase price. Make sure you can pay these costs before you apply for a refinance.
4. Understanding No-Closing-Cost Refinances
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. Your lender may also give you the option of rolling your refinance closing costs into your loan.
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 required to pay $4,500 for your closing costs upfront. Once your loan matures, 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, say your lender also offers you a no-closing-cost refinance with $0 in closing costs but a 4% APR. That would mean you pay a total of $107,804.26 in interest by the time your loan matures. Just a half percentage point of difference causes you to pay over $10,000 more for your loan than you would if you’d 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.
5. Make Upgrades Easy To Find
As previously mentioned, 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.
It’s important that you’re present for your appraisal, and that you 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 can help increase the overall value of your property.
6. 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. However, if the appraisal comes back low, you may need to adjust the amount you’re asking for in a refinance.
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. It’s best to 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 away 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.
7. Respond To Lender Inquiries Quickly
As for how long your refinance takes, you can typically expect it to be around 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.
Mortgage Refinance FAQs
Do you need an attorney to refinance?
In some states, it’s required to when have a lawyer review documents before closing when refinancing your mortgage. However, even if it isn’t required, it may be a good idea to hire a real estate attorney who can protect your interests and help guide you through the refinancing process.
Does refinancing hurt your credit?
Refinancing requires a hard inquiry, which means that credit bureaus pull your full credit report and deduct points from your credit score. This may temporarily have a minor impact on your score – but refinancing will benefit your score in time as it may significantly lower your debt and monthly payments. Hard inquiries stay on your credit report for 2 years and typically only affect your credit score for 1 year.
It’s important to understand that while you shop for rates, you’ll want to have all lenders submit their inquiries within the same timespan. Credit bureaus will view several inquiries as one if they fall within a 14 to 45 day period. If you have multiple hard inquiries spread over a longer period of time, your score will likely drop more drastically.
The Bottom Line
Refinancing your home can be a tricky and time-consuming process, but with these tips and tricks, you can better ensure a smooth experience. Knowing your financial situation, understanding your refinance options and staying in touch with your lender helps a refinance go off without a hitch.
Now that you have these refinance tips locked away, get the process started with Rocket Mortgage® and prepare for smooth sailing.
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