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 the process will eventually require 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. Three major reporting bureaus issue credit reports and scores: Experian®, TransUnion® and Equifax®. Each credit bureau may have a slightly different version of your credit report. This is because companies you have loans or credit cards with may not report to all three bureaus, causing your score with one bureau to be higher than with another.2. Check Your Credit Score And Report
It’s important to check each of your credit reports before you apply for a refinance to make sure they have no mistakes. Even small mistakes can lower your score and hurt your chances of qualifying for a refinance. Be sure to immediately report any mistakes you find to each credit bureau.
Be Proactive If Your Score Is Low
If your score is lower than anticipated, you may want to look into refinancing options for those with low credit scores. These loans may allow you to refinance your mortgage, but they may also have higher interest rates, making them potentially more expensive than your original home loan.
If this is the case, focus on improving your credit score before you refinance, particularly if your credit score is 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.
3. Understand Your Equity
If you want a cash-out refinance, you first need to know how much equity you have in your property. Equity is the difference between your home’s market value and what you still owe on your mortgage. You build equity every time you make a payment on your mortgage loan, because you pay down some of your principal balance. You can access this equity in cash when you choose a cash-out refinance.
Many homeowners choose a cash-out refinance when they want to refinance to pay down debt or cover repair costs, because mortgage interest rates are typically lower than the interest rates on other types of debt.
Most mortgage lenders won’t loan you 100% of your equity with a refinance. In fact, conventional loans and Federal Housing Administration (FHA) loans require that you still have at least 20% equity in your home when the refi is complete. With Department of Veterans Affairs (VA) loans, on the other hand, you don’t have to leave any home equity, post-transaction. 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.
4. 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 to purchase a home. The specific closing costs you’ll pay depend in part 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’re approved to refinance your loan or not.
- Appraisal fee: Your lender will typically 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 appraisals also ensure that they aren’t loaning you more money than your home is actually worth.
- Inspection fee: In some states, you must have a special inspection (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: Some states may require you to hire an attorney 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 again pay for title insurance, which protects you and your lender against other claims to the property.
You can expect closing costs to equal around 3% – 6% of your refinance loan amount. Make sure you can pay these costs before you apply, or inquire about having your lender roll them into your refinance loan so you don’t have to pay them upfront.
5. Be Careful With 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 closing costs, but you’ll need to take on a higher interest rate in exchange for this convenience.
Closing costs can be $6,000 – $12,000 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 in interest when all is settled. Be sure to do the math and see how much extra you’ll pay before you take a no-closing-cost refinance.
For example, let’s say you want to refinance a $150,000 loan with a 30-year term at an interest rate of 6%. You’re required to pay $4,500 for your closing costs upfront. Once your loan matures, you’ll pay $173,757 in interest over your loan term if you pay your closing costs upfront.
On the other hand, perhaps your lender also offers you a no-closing-cost refinance with $0 in closing costs but a 6.5% APR. That would mean you pay a total of $191,317 in interest by the time your loan matures. Just a half percentage point of difference causes you to pay over $17,500 more for your loan than you would if you’d paid your closing costs upfront.
6. Make Upgrades Easy To Find
As previously mentioned, with a refinance, your lender will typically order an appraisal to make sure that your home’s value matches up with your new loan. One of the factors influencing 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 as it may affect the determined value of your property.
7. 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 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 loan amount you’re asking for in a refinance.
Here are a few ways 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 give your appraiser additional comparable homes to see how property values are trending in your area.
- Spruce up your exterior. Take a few steps to make your property look great before your appraisal. Mow your lawn, do some gardening, and stow away any children’s toys before the big day.
- Make sure your home is tidy. You don’t want a messy house to 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.
8. Respond To Lender Inquiries Quickly
The exact length of time it’ll take to refinance your home can vary, but you can typically expect around 30 – 45 days. You can ensure that your refinance goes smoothly by responding to any inquiries from your lender as soon as possible. Your lender might ask for additional documentation supporting your employment or financial history during underwriting. It’s important to send these documents to the lender promptly.
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.
