Knowing what to expect when you refinance can save you both time and money. We’ll go over a few simple refinance tips you can use to make getting your new loan as easy as possible.
Know What You Want
There are lots of reasons you might want to refinance, and here are a few of the main ones:
- Get a lower payment. Having trouble making your mortgage payments? Refinancing to a longer term can lower your monthly payment.
- Pay off your loan faster. You might want to shorten your term if your income is higher now than it was when you first applied for your loan. Shortening your term saves you money in interest and helps you own your home sooner.
- Take a lower interest rate. Refinancing can save you thousands of dollars in interest payments if rates are low.
- Take out cash. A cash-out refinance replaces your current mortgage loan with a higher principal balance. Your lender gives you the difference in cash. You can use that cash to pay off credit card debt, make home improvements or boost your retirement savings.
- Remove mortgage insurance. Do you have an FHA loan? Many homeowners refinance their FHA loan into a conventional loan once they hit 20% equity to remove the mortgage insurance premium (MIP) requirement.
Sit down with your finances and decide how you can improve your loan. Then search for a lender who specializes in your type of refinance.
Check Your Credit Report For Errors
Your credit score plays an important role in your ability to get a refinance. Does your score seem lower than it should be? It might be because you have errors on your credit report. Removing these errors can improve your chances of a successful refinance.
You can get your free TransUnion® credit report and track your credit score with Rocket HomesSM. Some of the most common credit reporting errors include:
- Incorrect personal information: Make sure the reporting bureau spells your name correctly. Also check your address, Social Security number and employment information to make sure they’re all correct.
- Accounts listed as “closed by lender”: You’ll lower your score if an account you closed voluntarily is on your report as “closed by lender.”
- Bad debts more than 7 years old: Credit reporting bureaus must remove negative items like missed payments from your credit report after 7 years.
- Duplicate accounts: You can lower your score if an account with negative items is present on your report more than once.
Have you noticed an error on your credit report? Contact the credit reporting bureau that issued the report. You must contact each bureau individually (TransUnion®, Equifax® and ExperianTM) if an error is present on all three reports.
Have Application Information Ready
Your lender will usually ask you for some financial documentation when you apply for a refinance. These documents ensure your lender that you can cover your mortgage payments and other expenses.
Some documents your lender will probably ask you for include your:
- Two most recent W-2s
- Two most recent bank statements
- Two most recent pay stubs
Are you self-employed? Your lender will probably ask you for more information to verify your income. Pull your full tax return just in case your lender requests it. If you’re applying for a refinance with someone else (like a spouse) your lender will ask for their information as well.
Have your documentation prepared before you apply for your refinance so you can close on your loan faster. Make sure you respond to any lender requests for additional information during underwriting. This keeps your refinance on schedule.
Raise Your Credit Score
A low credit score doesn’t just hurt your chances of getting a refinance, it can also cost you money. A low score means you won’t be able to take advantage of the lowest interest rates available. This means you’ll pay thousands of dollars more over the course of your loan.
You can save a lot of money on your refinance by taking some time to improve your credit score before you apply. Here are some tips you can use to boost your credit fast:
- Make all your payments on time. About 35% of your FICO® Score comes from your payment history. The easiest and most reliable way to build up your credit score is to create a long history of timely payments. Be sure to make at least the minimum monthly payment on all your loans and credit cards.
- Limit your credit utilization. Credit utilization refers to the amount of your total available credit you use each month. You may be more likely to miss a payment if you use too much credit per month. You can increase your credit score by using no more than 30% of your total available credit each month. Create an effective household budget, cancel automatic-renewal subscriptions that aren’t necessary and carry cash on you to help you keep your credit utilization low.
- Don’t close old credit cards. Have you had trouble with credit card usage in the past? You might assume that closing unused cards will boost your score. Unfortunately, the opposite is often true. You automatically increase your total credit utilization and lower your score when you close a line of credit. Leave your unused card in a locked desk drawer or with someone you trust to avoid the temptation to overspend.
Keep track of your credit score and apply when your score is high. Avoid applying for new credit at least 2 months before you apply for your refinance. These applications can temporarily reduce your score and hurt your chances of getting a lower interest rate.
Shop Around For Lenders
You don’t need to refinance with the same lender who holds your original mortgage. Don’t be afraid to compare lenders before you apply for a refinance. Ask each lender questions about their availability, fees and current interest rates. Write down each lender’s answers and keep customer representative information handy as well. This way you can compare them later and make the best possible decision.
Lock Your Interest Rate
Your lender may give you the option to lock your interest rate when you apply for a refinance. You secure your new loan’s APR when you lock your rate as well as protect yourself against changes in market interest rates. Mortgage interest rates change on a daily basis, so this protection is important to keep your mortgage costs predictable.
Ask each lender if they offer rate locks and if rate locks are free or if you need to pay to lock down your interest rate. Finally, ask your lender how long you can lock your rate for. Most lenders allow you to lock your interest rate for 30 to 90 days.
Anticipate Closing Costs
Many homeowners overlook closing costs when they refinance. Just like when you take out your original mortgage loan, you’ll pay closing costs when you refinance. The specific closing costs you’ll need to cover will vary depending on where you live. Some common expenses you might see include:
- Attorneys’ fees
- Title insurance and title search expenses
- Application fee
- Inspection fee
- Appraisal fee
- Discount points
As a general rule, you should expect your closing costs to range between 2% – 3% of your total loan value. Depending on your lender, you might be able to roll your closing costs into the loan. This will increase your loan amount, and you’ll end up paying more in interest over the life of your loan. You can save both money and stress when you refinance by paying your closing costs up front.
Set Yourself Up For Appraisal Success
Most refinances require that you get another appraisal before you close on your loan. You can attend your home appraisal when you refinance. This means that there are a few steps you can take before your appraisal to ensure a higher home value:
- Spruce up your curb appeal. Your curb appeal influences the overall value of your home. A few weeks before your appraisal, take a look at the exterior of your home and see where your property can use some touch-ups. Things like power washing your walkway or planting a few flowers may seem like small updates, but they can aid in the overall opinion of the property’s condition.
- Make a list of all permanent upgrades. Permanent upgrades you’ve made since you moved into your home increase your property’s value. Create a list of all the upgrades you’ve made to your home and present it to your appraiser before the tour begins.
- Set the atmosphere. Your appraiser won’t deduct points from your home value if you’ve left a few books out of place or if you haven’t done the dishes. However, a messy or uncomfortable home can subconsciously influence an appraiser’s view of your home. Set your thermostat to a comfortable temperature, do some decluttering and make sure pets are out of the way on the day of your appraisal.
A high home value is good news for both you and your lender. Make sure to take some time to improve your chances of a successful appraisal before your appraiser arrives.
There are a number of steps you can take to reduce your stress before and during a refinance. First, know exactly what you want to get out of your refinance and compare lenders. This will help you choose the best possible lender to service your refinance. Have your financial documentation and information on hand before you submit your application.
You can save money and stress by knowing and improving your credit score before you refinance. Check your credit reports for errors and take some time to improve your score if it’s low.
Once you submit your application, improve your home to ensure a successful appraisal. Also, lock down your interest rate to keep your loan expenses predictable. Finally, make sure you can cover closing costs before you finalize your refinance. Though you may have the option to roll these costs into your principal loan balance, this option is often more expensive in the long run than paying costs up front.
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