If refinancing your home is of interest to you, make certain to arm yourself with some key information so your chances of loan approval will increase. The following paragraphs cover several useful tips that can make the entire process of refinancing much easier.
There is no need for a home refinance to be an overly complicated process. The concepts below are sure to get you on the right track.
Be Aware of Your Current Credit Score
Are you at least generally aware of your current credit score? It is wise to know your precise FICO score in advance of submitting a refinance loan application. Credit scores are important in terms of the rate of interest you will have to pay and the sorts of loans for which you will be eligible. Getting your credit score is easy, and all you need to do is review your own credit report.
The three major credit reporting agencies are TransUnion, Experian, and Equifax. Though not everyone realizes this fact, the reports provided by these bureaus are not the same. You may have credit cards or loans that are not reported to all of the agencies, and this can play a role in the different scores you receive from each bureau. Prior to applying for a home refinance loan, make sure to review each of the three credit reports to ensure that they are error-free. Mistakes in reporting can harm your score and reduce the likelihood of receiving the loan you want. If mistakes are noticed on any of the reports, make sure to report them to the applicable credit bureau.
It may be that you should spend some time raising your credit score in advance of applying to refinance your home. If your score is lower than you would like, make sure to make timely payments on all accounts, limit your spending, and reduce your outstanding debt load in order to see the increases you want.
Get a Handle on Your Home Equity
If you are interested in a cash-out refinance, it is necessary to have a solid grasp of your existing home equity. This is basically the portion of the home that you have already paid off and therefore own without encumbrances. Each time you make your mortgage payment you build home equity, because you pay off part of the loan principal. Selecting a cash-out refinance allows you to tap some of your equity in the form of cash. Lots of homeowners opt for cash-out refinance loans if they want to pay off debts or pay for home repairs when the interest on a mortgage loan is lower than they would have to pay for other forms of credit.
Keep in mind that the majority of lenders are unwilling to loan 100% of your existing home equity on a refinance loan. You will likely be able to secure no more than 80% to 90% of your equity through such a mortgage. As such, it is necessary to have a firm handle on how much money you truly require and whether your existing equiry is sufficient to help you get it.
If you are unsure about your current home equity, simply review a mortgage statement from your home lender to determine how much of the principal balance you have already repaid.
Keep Closing Costs in Mind
Closing costs are always a part of a refinance loan, as is the case with a purchase loan. The exact total of these costs will depend on factors including where you reside, though there are some types of closing costs that are fairly standard, including:
- Appraisal Fee: Lenders require appraisals before granting refinance loans. These convince the lender that the home’s value has not declined since it was initially purchased and provides assurance that you are not borrowing more than the house is truly worth.
- Loan Application Fee: Lenders may request the payment of a fee upon application for a refinance loan. This fee must be paid whether your loan application is approved or not.
- Home Inspection Fee: In certain states, a special inspection is required prior to closing on any refinance loan. This may also be required in order to qualify for some government mortgage loans.
- Attorney Fee: Certain jurisdictions require you to have an attorney review all refinance loan documentation before closing can occur.
- Title Search and Insurance Fees: If your refinance loan is obtained through a new lender, it may be necessary to pay for a new title search. It may also be necessary to pay once again for title insurance, which protects the lender (and you) from other potential claims against the real estate.
Closing costs, generally speaking, tend to be roughly 3%-6 of the purchase price, so be certain that you can cover this expense before applying for a refinance loan.
Refinance Loans with No Closing Costs
If closing costs are an obstacle, a lender might suggest that you consider a no-closing-cost refinance loan. Such a lender would waive closing costs, but would charge a higher rate of interest in exchange.
Given that a $200,000 refinance loan could come with closing costs of up to $6,000, this may initially seem like the way to go. However, it is good to remember that you will end up paying more than that amount over the life of the mortgage.
Make certain to make the time and run the numbers to determine just how much extra a no-closing-cost refinance loan will cost you as opposed to a loan in which you pay the closing costs upfront. The difference can be significant.
Highlighting Home Upgrades
Because lenders require appraisals of the home to ensure that the loan is a prudent one, it is important to be able to highlight any upgrades you have made to the home since the initial purchase. Some upgrades, however, may not be immediately apparent to an appraiser, so this is where you come in.
Make sure you are present during the appraisal itself and provide a list of the lasting upgrades that have been made to the home. This should include contractor receipts, permits and the like. Feel free to walk the home as the appraiser does, making note of everything you have done to improve the home. This will boost the value of the real estate and raise your chances of securing the refinance loan.
Setting The Stage For Success
Appraisal professionals work to give your home an estimated value. Ideally, the appraiser will indicate that the home is worth more than the price you paid. If, however, the appraisal is disappointing, you might need to tweak the loan amount you are seeking.
There are a series of strategies you can use to boost the likelihood that your appraisal will come out the way you want:
- Due diligence: The value of homes in your area will impact your property’s value. As such, do some research into what properties like yours are going for, and give the appraiser a list of recent sales. That way, the appraiser will have a quick reference on the home value trends in your geographic location.
- Freshen the Exterior: Boosting your home’s curb appeal can go a long way toward helping an appraisal along. Cut the grass, do some landscape cleanup, and eliminate clutter before the appraiser comes calling.
- Create Comfort: Do whatever you can to create a comfortable feel in the home. Tidy up, relocate pets, and keep the temperature moderate when the appraiser visits.
- Be Responsive: Refinancing processes typically take between 30 and 45 days. To ensure that things move smoothly, make sure you answer any lender questions just as soon as you can. Lenders sometimes need additional documents to verify your work history or your credit record, and it is best to get this information to the lender within a day or two, if possible, and make sure your contact details are included in case further questions arise.
Once the underwriting process is complete and your appraisal has been reviewed, you will be sent a Closing Disclosure document. This covers the full terms of the refinance loan, provides the total closing costs, details the rate of interest, and more. Lenders are required to provide no less than three days for you to review this document after it is received. Make sure to acknowledge receipt of the Closing Disclosure as soon as it reaches you.
Concluding Thoughts
By heeding the advice found above, it really is possible to pave the way for a surprisingly smooth home refinancing process. Make sure you have a solid grasp of your current financial circumstances, understand your credit score, and determine precisely how much home equity you presently have. Doing these things will help you find the refinancing options you need.
Prior to starting the refinance process, be certain that you will be able to pay the closing costs associated with such a loan. Perform some calculations and determine how much more you will pay if you forego closing costs and opt for a higher interest rate instead. Always acknowledge receipt of the Closing Disclosure document and respond promptly to any inquiries from your lender. Lastly, making your home appealing to appraisers will boost your chances of achieving the home refinancing you want.
