Ensuring Every Home Mortgage Refinance Goes According to Plan
Refinancing your home mortgage can be a great way to save money on your monthly loan payment or provide you with the cash you need to complete a home improvement project. But it would be a lie to say that every refinance goes smoothly.
When you refinance your home loan, there are a lot of moving parts, and your lender will place you under the same scrutiny as when you applied for your original loan. If anything is out of place or missing, your application can be denied.
If you want to refinance to take advantage of the low interest rates before they rise any higher, then here are ten things you are going to want to watch out for, so your mortgage refinance can go smoothly.
#1: Your Credit Score
To qualify for a mortgage refinance, you will need to meet the lender’s credit score requirements, so before you apply, checking your credit should be the first thing you do. Most lenders have a minimum credit score requirement, which is usually 620, but if your score is below 740, then you may not get as low of a rate as you were hoping. If you want to get past the first box in the lender’s requirements, then check your credit and do what you can to get it as close to 740 as possible before you apply.
#2: Your Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is a percentage that pertains to the amount of debt you pay for every month versus the amount of money you earn. For many homeowners, their DTI tends to get higher once they get their home loans approved because life takes over after they move into their homes and they start using credit cards, taking out auto loans, and financing other large purchases. For your refinance to go smoothly, you will want your DTI to be no higher than 43%.
#3: Your Home Equity
If you are applying for a conventional mortgage refinance, then the amount of equity you have in your home will play a role in your approval chances. This is because your equity is a part of your loan-to-value ratio (LTV), which measures how much you are borrowing versus how much your home is worth. Ideally, you want as low an LTV as you can get, but most lenders require refi applicants to have at least 20% equity in their homes to qualify. There are exceptions, of course. If you refinance using a VA IRRRL, FHA streamline, or USDA streamline refinance program, then the lender won’t consider your LTV.
#4: Your Reason for Refinancing
Before you refinance, you should identify what your reasons are for doing so. While not all lenders will ask, many may, and your answer could affect how smoothly your refinance goes. For instance, if you are refinancing because you want to consolidate credit card debt, your lender may be hesitant to approve because both their and your risk level will be higher. After all, should you be unable to afford the higher monthly payment, then you could wind up losing your home.
#5: Closing Costs
When you refinance your mortgage, you are getting a new loan to replace your original loan. This means that you will have to pay closing costs on your new loan, which depending on the lender can range from 2% to 6% of the loan amount, and this can be a sizable sum. If you don’t have the cash on hand to cover your closing costs, you may still be able to refinance if the lender agrees to roll your fees into your mortgage. This will, however, result in your amount borrowed being increased and it can cause your interest rate to go up as well, both of which can negatively impact any potential savings you were hoping to achieve.
#6: Home Upgrades or Improvements
Your lender will send an appraiser to your home to make sure your home’s value matches up with your new loan amount. If you have had any home improvements or upgrades completed since you purchased your home, then you will want to make sure the appraiser acknowledges them as they will increase your home’s value and make your refinance go smoother. So, make sure you are home for the appraiser’s visit and accompany them on their inspection, so you can answer any questions and point out the improvements.
#7: Your Break-Even Point
When you refinance a home mortgage, it is important to know what your break-even point will be. This is the length of time it will take for your savings to equal the amount of money you had to pay to refinance. For many borrowers, this can be three to five years or even longer. This is important to know because if you are planning on moving before you break even, then you will wind up losing money on your refinance even though your payments are lower.
#8: Your Paperwork
Nothing slows down a refinance application like missing documents or inaccurate records. If you want your refinance to go smoothly, then you need to be organized and provide your lender with all the paperwork they require from the start. Find out exactly what documents the lender will need and make sure you get them.
#9: Lender Choices
Most homeowners use their current mortgage lender when they are looking to refinance, but sometimes, you might be able to get a better deal by looking elsewhere. Don’t get tunnel vision when refinancing. Shop around and see what different lenders are willing to do for you. You may find one lender offers a lower rate and a smoother approval process than the others.
#10: Rate Lock Periods
When you find a lender that you are happy with and a rate that you want, make sure you lock the rate in. But something you will want to watch out for is the length of the lender’s rate lock. Most lenders will lock in a rate for anywhere from 15 to 60 days, but some may not close within that time. When the time it takes to close is longer than the rate lock, the guaranteed rate expires, and you could wind up with a higher rate or be forced to pay for an extended rate lock period. To help avoid this, you should ask the lender upfront how long their closing process usually takes and then ask for a lock rate period that is appropriate.
