Breaking Down Mortgage Refinancing
If you’re considering doing a mortgage finance, there are many information to dig through and digest. It’s not a process you want to take lightly, because you’ll be likely to have a long-term loan for many years or even decades. Here are some breakdowns to help you find your way through the complicated process of refinancing your mortgage.
It Starts with Credit Score
The first thing in the process of refinancing your mortgage, of course, is to be aware of where you stand in terms of credit score. Check with the three major report bureaus (Experian®, TransUnion® and EquifaxTM). Make sure you check all three companies and ensure there are no mistakes in their reports. If you find any mistakes, report them immediately, since these mistakes can affect your credit score and may hurt you chances to refinance your mortgage. Check out annualcreditreport.com to get a free report of your credit.
Getting Your Credit Score Up
After you know your credit score, you can try to improve it if it is not satisfactory to get a mortgage refinance. Lenders will obviously want to loan out to applicants who have higher FICO scores. Most people can improve their credit score quickly by paying down their credit card debts. You want to be under 15 percent of your credit card limit.
Different Types of Refinance Loans
Once you are sure your credit is good to get a mortgage finance, you want to understand the types of different refinance loans.
In a Cash-Out Refinance, you are basically getting a new loan to pay off the old loan. In addition, you get cashback based on the equity of your loan. In this case, you basically replace the old loan with a new loan with a better rate.
The other type of refinance is called a home equity loan and lines of credit (HELOC). You are getting a new loan using the equity in your house. You are still paying the original loan, hence this type of refinance is basically a second mortgage.
Another type of refinance is called a streamline refinance. This type of loan is for those who have a VA or FHA loan that is backed by the government. Since it is government-backed, the refinance will require less documentation and the process is streamlined, hence the name.
Make Sure to Shop Around
Get the beat mortgage deals by shopping around and comparing the rates. Try to shop at least three lenders. Don’t look at just the interest rates but also the customer ratings of the lenders and compare the closing costs. In short, you want a reputable lender who gives you a good rate and is known to close their loans on time.
Equity is Your Leverage
If you are considering a cash-out refinance, it is necessary to know how much equity you have in your house. The equity is basically what you have paid off from the mortgage. Your home equity increases as you make a payment on your mortgage each time, so over time your equity increase.
When you take a cash-out refinance, you can “cash out” on part of this equity and use that cash amount for your other needs such as paying down a credit card debt, starting a home project, paying repair costs, etc. You can’t just cash-out for 100 percent of your equity. Most lenders will let you borrow up to 80-90 percent of your home equity maximum. The best way to find out exactly how much equity you have in your house is to request a mortgage statement from your lender.
Watch the Closing Costs
Since you will have to pay closing costs to finalize your refinance, make sure you can afford these costs before applying. The closing costs can be around 3 to 6 percent of the purchase price. The most common fee is the application fee that you have to submit along with your refinance application. Unfortunately, this fee is non-refundable even if your loan is not approved.
Another fee is the appraisal fee. An appraisal needs to be done so the lender knows your actual property value and that the loan value you are applying for is not more than what you house is actually worth. In some areas, you will need to your home inspected, so an inspection fee may be part of the closing costs. If an attorney needs to review your refinance documents, you will have to pay the attorney fee.
Your lender may offer a No-Closing Cost refinance but you will typically pay a higher interest rate as a trade-off. It may sound enticing to have no closing costs, but just a half percentage point increase on a $150,000 30-year loan, for example, may have you end up paying over $10,000 more over the course of the loan.
Your Property Value
Property values have been shooting up in many areas of the US in recent years. Getting an accurate estimate of your home’s actual value will let you know how much equity you have in your home so you don’t end up over-paying to refinance. Most lenders will actually require a property appraisal also.
Some types of refinance loans such as the FHA Streamline Refinance and VA Streamline Refinance do not require new appraisals.
There are many online tools to determine your property value. You can also request something known as a Broker’s Price Opinion (BPO) or Comparative Market Analysis (CMA) for a local real estate agent.
Don’t Just Take Any First Offer
One final thing to remember is that rates and fees are negotiable. Obviously, you don’t have to accept the interest fee as offered by the lender. You also have the choice of shopping other lenders. Other fees like title, escrow, and origination fees can also be negotiated. In the end, do you good diligence and try to save money and shop around as much as you can.