8 great tips for refinancing your mortgage

When you refinance a mortgage, you replace your existing home loan with a new one. Most of the time, you do it to lock in better loan terms, such as a lower interest rate or monthly payment. However, you can also refinance to pull out some of your home equity as cash.

To make the most of refinancing your mortgage, make sure you understand the requirements and adhere to best practices. Otherwise, what looks like a good deal could turn out to be a bad one. Here are our top tips to ensure your next refinance is a smooth and profitable transaction:

1. Decide why you’re refinancing

When you know why you’re refinancing, you can better judge loan terms, compare loan offers, and choose a loan type that meets your needs. Here are some common reasons to refinance:

• I want to lower my monthly payment. Lowering your mortgage payment can free up cash flow for other expenses or investments. Think living expenses, college tuition, or retirement savings.
• I want to lower my interest rate. Your loan’s interest rate determines your cost of borrowing. By lowering it, you could save thousands of dollars over the life of the loan.
• I want to change the length of my loan’s term. Reducing your loan term often means higher payments, a sooner loan payoff, and lower total interest costs. Increasing the loan term means lower payments, a delayed loan payoff, and higher total interest costs.
• I want to use the equity in my home. Leaving equity in your home can be like leaving money on the table. With a cash-out refinance, you can unlock equity to put toward renovations or other investments. 
• I want to get rid of private mortgage insurance (PMI). Most lenders charge PMI if you put down less than 20% on a mortgage. However, even after you’ve surpassed 20% in equity, you may still have to pay PMI (as with FHA loans). Refinancing to a new loan can eliminate this extra cost.

2. Check your credit score and report

Lenders use your credit score to determine what interest rate and loan terms to offer you. As a result, it’s important to know where you stand by checking your credit report.

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. You may also want to get a tri-merge credit report that combines information from all three credit bureaus.

What to do if your score is low

Credit scores range from 300 to 850, with anything below 580 considered poor credit. If your score falls in the “poor” range, your lender may deny you a loan or require you to take on a higher interest rate, increasing the loan’s cost.

However, you can boost your odds of refinancing with a poor credit score by offsetting it with a larger down payment, a co-signer, or other mitigating factors. Plus, you can always work on repairing your credit before you refinance to improve your loan options.

3. Estimate how much equity you have

Equity is the portion of your home’s value that you own. A cash-out refinance helps you tap into this equity by replacing your current mortgage with a larger one and letting you keep the difference as cash.

Before you do this, however, estimate how much home equity you have by subtracting your mortgage balance from your home’s current market value:

Your home equity = Your home’s current market value – your mortgage’s balance

If you don’t know what your mortgage balance is, request your latest mortgage statement from your lender. It will list how much you still owe on the loan.

Determine how much equity is available to borrow

From there, you can determine how much cash you can borrow while maintaining your lender’s loan-to-value (LTV) requirement. Most lenders set an LTV limit to ensure you leave some equity in the property as collateral, or skin in the game.

For example, here are the LTV limits for different refinance loan types:

Find out what your lender’s LTV requirement is, and then use it to calculate how much cash you could pull out. For example, if the LTV limit is 80% and your home is worth $300,000, the most you could borrow is $240,000 ($300,000 x 80%) minus your mortgage balance.

4. Prepare for closing costs

Refinancing incurs closing costs just like new mortgages do. Factor these in when deciding whether to refinance and for how much. Here are common closing costs to consider:

• 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.

5. Be careful with no-closing-cost refinances

That said, some refinances don’t come with closing costs. They’re called no-closing-cost refinances. The catch is that they typically come with higher interest rates, so carefully review the loan’s terms and total cost before choosing this option.

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 up front. 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. Explain any upgrades to your appraiser

Before approving your refinance, your lender will want a professional appraisal to confirm your home’s value, since the property serves as collateral for the loan. To ensure a smooth appraisal process, be ready to point out any upgrades or remodeling work that raise your property’s value and provide relevant receipts or photos as proof.

7. Set yourself up for a successful appraisal  

During the appraisal, a licensed professional will assess your home’s worth based on what similar properties nearby sold for recently (aka “comps”), making adjustments for any differences in property size, age, condition, features, etc.

Ultimately, you’ll want the appraisal to come in high enough to justify the loan amount. To that end, here are some ways to prepare for the appraisal:

• Boost curb appeal. A well-kept exterior creates a strong first impression that can improve the appraiser’s perception of your home. Think trimmed landscaping, clean walkways, and fresh paint.
• Tidy up. A clean, clutter-free interior helps showcase the home’s condition and signals that the property has been well-maintained.
• Ensure easy access. Make sure every area of the home — including the basement, attic, garage, and utility spaces — is accessible so the appraiser can complete a thorough inspection without any trouble.

8. Respond to lender inquiries quickly

Refinancing generally takes 30 - 50 days. To avoid delays, respond to your lender quickly when they have questions or request further documents. For example, your lender may need additional proof regarding your income or employment to finalize their underwriting.

Once underwriting is complete, your lender will send you a Closing Disclosure outlining the final loan terms. By law, you must receive it at least 3 business days before closing, giving you time to review the details carefully.

FAQ

Here are answers to frequently asked questions regarding refinancing:

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: Preparation is key when refinancing your mortgage

Refinancing can be a smart financial move, but it takes preparation. By clarifying your goals, checking your credit, understanding your equity, and planning for costs, you can position yourself to secure beneficial loan terms. Whether you want to lower your monthly payments, shorten your loan term, or tap into your equity, the right refinancing strategy can do the job.

Ready to explore your refinancing options? Talk to a Rocket Mortgage^® Home Loan Expert today to find a solution that meets your needs.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.