8 Great Tips For Refinancing Your Mortgage

When you refinance your mortgage, you replace your current home loan with a new rate, loan term or principal balance. The funds from your new loan pay off your old mortgage, offering you a single monthly mortgage payment that can be more affordable and manageable.

Understanding the requirements to refinance your mortgage is only half the equation. The other half is to learn the do’s and don’ts of mortgage refinancing to help ensure a straightforward and successful process. Let’s look at eight tips to simplify refinancing your house.

1. Determine Your Reason For Refinancing

Before applying for a mortgage refinance, figure out why you’re refinancing in the first place. Here are a few common reasons homeowners refinance their mortgages:

• To lower their monthly payment
• To lock in a lower interest rate
• To shorten or lengthen the loan term
• To access the equity in the property
• To remove private mortgage insurance (PMI)

Understanding your goals will help you choose the right type of mortgage refinance.

2. Check Your Credit Score And Report

Your credit score is a critical factor that helps determine how much you’ll pay in interest and what loan types you can qualify for. Because the process requires a hard credit check, it’ll trigger a temporary dip in your score.

The three major credit reporting bureaus are Equifax®, Experian™ and TransUnion®. While each bureau maintains a credit report on you, their information may not match. Some companies don’t report loan or credit card activity to all three bureaus. As a result, your score with one bureau may be higher or lower than your score with the other bureaus.

Before you apply for a refinance, check each credit report for errors. Even minor errors can lower your score and hurt your chances of qualifying for a refinance. If you find any errors, report them immediately to the appropriate credit bureau.

Be Proactive If Your Score Is Low

If your score is lower than expected, you may need to look into options to refinance with bad credit. While you may qualify to refinance, you’ll likely pay a higher interest rate. A higher rate may make a refinance loan more expensive than your original home loan.

Another option is to focus on improving your credit score before you refinance. Paying your bills on time, keeping your spending under control and paying off debt will help your credit score climb.

3. Estimate Your Equity

If you want a cash-out refinance, figure out how much equity you have. Home equity is the difference between your home’s market value and what you owe on your mortgage. With every payment on your mortgage loan, you build equity because you’re paying down the loan’s principal balance.

Many homeowners choose a cash-out refinance to cover home repair costs or pay down debt because the interest rate on a cash-out refinance is typically lower than the rates on their existing debts.

Consider Home Equity Availability

Most mortgage lenders won’t offer a refinance loan for 100% of your equity. When you refinance conventional and Federal Housing Administration (FHA) loans, you typically need at least 20% equity left in your home after the refinance is complete. With Department of Veterans Affairs (VA) loans, you can potentially borrow a higher percentage of your home equity than with a conventional or FHA loan.

It’s important to know how much money you need before you apply and whether you have enough equity to cover the loan amount. Not sure how much equity you have in your home? Request a mortgage statement from your lender to see how much mortgage principal you’ve paid off.

4. Don't Forget About Closing Costs

Like taking out a mortgage loan to purchase a home, you must pay closing costs to finalize your refinance. What you pay in closing costs will depend on where you live. Some typical fees borrowers can expect to encounter include:

• Application fee: Your lender may charge an application fee for the refinance loan. You’ll pay this fee whether your loan application is approved or not.
• Appraisal fee: Your lender will typically require a home appraisal before you refinance. Appraisals assure lenders a homeowner’s property value hasn’t gone down since they bought the home, and they aren't lending more money than the property is worth.
• Inspection fee: In some states, you must schedule a special inspection, like a pest inspection, before you close on a refinance. Certain government loans may also require an inspection to qualify.
• Attorney review and closing fee: Some states require borrowers to hire an attorney to review their refinance documents before closing. A real estate attorney will charge their own fees.
• Title search and insurance: You may need to pay for another title search if the lender you’re refinancing with didn’t service your original loan. You may have to pay for title insurance again to protect you and your lender from claims against the property.

Closing costs generally range from 3% – 6% of the total refinance loan amount. Make sure you can pay these costs before you apply. If you want to finance your closing costs, ask your lender about rolling them into your refinance loan so you don’t need to pay them upfront. However, your closing costs won’t disappear because you rolled them into the loan. A lender will spread out the costs across the entire loan term.

5. Be Careful With No-Closing-Cost Refinances

Your lender may offer you a refinance without closing costs. They'll waive your closing costs, but you’ll take on a higher interest rate in exchange.

For a $200,000 refinance, a borrower may pay between $6,000 – $12,000 on closing costs, so it’s easy to see the appeal of a no-closing-cost refinance. But while you pay less upfront with a no-closing-cost refinance, you usually end up with a higher interest rate, which may translate to paying thousands more in interest over the life of the loan. Protect yourself by doing the math. Make sure a higher rate won’t wipe out your savings from refinancing.

No-Closing-Cost Refinance Example

Let's say you want to refinance a $150,000 loan with a 30-year term and a 6% interest rate and pay $4,500 in closing costs upfront. By the end of your loan term, you will have paid $173,757 in interest.

With a no-closing-cost refinance, you pay $0 in closing costs but get a 6.5% interest rate. In this scenario, you would pay $191,317 in interest by the end of the loan term. That half percentage point difference would cost you over $17,500 more in interest.

6. Make Upgrades Easy to Find

Your lender will typically order an appraisal to make sure your home is worth at least the amount you want to borrow. One factor that will influence the value of your property is the upgrades you’ve made on the property since you bought it.

Because certain upgrades may not be readily visible to an appraiser, you should be there during the appraisal. Give the appraiser a list of all the permanent upgrades you’ve made. Include contractor receipts, estimates and permits if you have them. Don’t be shy about pointing out upgrades. Every relevant upgrade to your home can potentially boost the property’s appraised value.

7. Set Yourself Up For Appraisal Success

An appraiser will visit your home to help estimate its fair market value. In the best-case scenario, the value they determine will be higher than what you paid for the home. If the appraisal comes back lower than expected, you’ll likely need to change your requested refinance loan amount.

Here are a few ways to improve your chances of a successful appraisal:

• Do your research: Property values in your area will also factor into the amount your home is worth. Research similar recently sold properties in your area and present the appraiser with your list to give them additional comparable homes to consider as they assess local property value trends.
• Spruce up the exterior: Make changes that show your property at its best. Mow your lawn, consider gardening or painting the front door before the big day.
• Tidy up your home: Don’t let a messy house influence your appraiser’s assessment. Do some light cleaning, keep pets out of the way and set your thermostat to a comfortable temperature.

8. Respond To Lender Inquiries Quickly

How long it takes to refinance a home can vary, but you can typically expect a time frame of 30 – 45 days. Keep your refinance on track by responding to any inquiries from your lender as soon as possible. Your lender may request additional documentation supporting your employment or financial history during underwriting. Send any requested documents to the lender promptly.

When your lender finishes underwriting your loan and reviews your appraisal, they’ll send a Closing Disclosure, which includes the final terms of your loan, including your closing costs and interest rate. Your lender must give you at least 3 days to review your Closing Disclosure.

Mortgage Refinance FAQs

Thinking of refinancing your home loan? Look at the answers to a few frequently asked questions about mortgage refinancing to help you make the best decision for your financial goals.

How can I tell if refinancing is a good idea?

Consider your goals. Refinancing may be the appropriate solution if you want to convert your home equity into cash, lower your monthly payment, lock in a lower interest rate or shorten your loan term to pay your mortgage off sooner.

Does refinancing always save money?

Not always. Depending on current interest rates, your monthly payment may be higher. However, refinancing may still make sense if it helps you accomplish other pressing financial goals. Review the terms of your existing loan to see whether refinancing to a new mortgage makes sense for your budget.

Do I need an attorney to refinance?

In some states, borrowers must have a lawyer review documents before finalizing a mortgage refinance. Even if you live in a state where it’s not required, consider hiring a real estate attorney. They can protect your interests and help guide you through the refinancing process.

Does refinancing hurt my credit?

Refinancing involves a hard credit inquiry, typically resulting in a temporary dip in your credit score. But refinancing may benefit your score over time. You can minimize the impact of the temporary dip by making on-time payments and paying down existing debts.

While a hard credit inquiry stays on your credit report for 2 years, its impact on your credit score typically lasts for 1 year.

Will shopping around for lenders hurt my credit score?

Shopping around for the right lender won’t hurt your credit score, but if you apply with several lenders to compare rates and terms, submit your applications within a short time frame so lenders submit their credit inquiries around the same time. Credit bureaus will typically group multiple inquiries as a single inquiry if they occur within 14 – 45 days of each other. Multiple hard inquiries spread over a longer period will likely drop your score drastically.

The Bottom Line

Refinancing offers many benefits, and with these eight valuable mortgage refinancing tips, you should be able to navigate the process successfully and make the most of the benefits refinancing offers. Help the process go off without a hitch by realistically assessing your financial situation, knowing your options and staying in touch with your lender through the entire process.

Now that you’ve locked away these refinance tips, you can start the process with Rocket Mortgage® and prepare for smooth sailing.