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Want to Refinance Your Mortgage?


Jul. 7, 2022 Yahoo! Money

Some people can still get a lower rate on their current home loan, however — and save some money in the process.

An estimated 472,000 well-qualified homeowners can still refinance their mortgages by at least 0.75 percentage points, according to the data and analytics company Black Knight. Doing so would save these homeowners an average of $309 per month on their mortgage payments — or about $3,708 per year.

Outside of cost savings, there are other reasons why refinancing now could make sense. If you are nearing the end of the fixed-rate period on an adjustable-rate mortgage, refinancing into a fixed-rate loan lets you lock in a steady rate that won’t change periodically. Another option is a cash-out refi, which allows you to use the equity you’ve gained in your home to pay off higher-interest debt.

Mortgage refinancing isn’t a quick process: the average closing time on a refi loan was 52 days in June, according to ICE Mortgage Technologies. So if a refinance makes sense for your budget, the sooner you start the better.

Here’s exactly how to do it, broken down into seven steps to help move the process along.

1. Set a refinancing goal

Most homeowners refinance in order to get a lower interest rate and, as a result, reduce their monthly payments. However, that’s not the only reason to refinance.

Different loan types offer different advantages.

You may want to switch from an adjustable-rate mortgage to a fixed-rate mortgage to guarantee a permanently lower rate. Maybe you want to switch from a 30-year loan to a 15-year loan to pay off your mortgage faster. If you have enough equity, you may also be able to save on mortgage insurance by switching from an FHA loan to a conventional mortgage.

Perhaps you’ve recently run up against major medical bills, unexpected home repairs or other expenses that are weighing you down financially. If you’ve built up enough equity in your home, a cash-out refi will not only let you refinance your loan but also take out extra cash.

Knowing what you want to accomplish with a refi will help you determine the type of mortgage product you need. Consider all the options to see which works best for you.

2. Check your home equity

You may be able to qualify for a conventional refi loan with as little as 5% equity in your home, according to Discover Home Loans. However, most lenders prefer you have at least 20% equity.

If you have more home equity, you may qualify for a lower interest rate and lower fees, as lenders will view borrowers who have higher equity as less of a lending risk. More equity also means that you are less likely to end up owing more than the home is worth if home prices fall.

To get an estimate of your home equity, subtract your current mortgage loan balance from your home’s current market value. The result will be your home equity. Contact a knowledgeable local real estate agent to get an idea of your home’s value. Zillow’s home price estimate can also be a rough starting point too.

You should also prepare your home for an official appraisal, which will be part of the refinance application process. Have documentation about any improvements you have made to the home handy. (For example, did you add a bathroom or replace an old roof?) It won’t hurt to clean and organize your home to get it in showing condition.

3. Check your credit score and credit report

Before making any loan decisions, it’s important to check your credit score, as well as your credit report.

Your credit score will in large part determine how favorable a rate a lender will offer. The higher your score, the lower the rate you’ll qualify for and the lower your monthly payments will be. If you have a low score, look for ways to improve your credit score well before applying for a loan.

Your credit report shows the information your score is based upon. It’s where you can check if there are any errors that may be negatively affecting your credit score. If you find mistakes in your report, you can contact the credit bureaus to have these items removed. Be prepared to provide documentation proving the mistake.

As part of the consumer protections put in place by the CARES Act, you can get a free weekly credit report from any of the major reporting bureaus until December 31, 2022. (Typically, you’re entitled to one free report from each credit reporting company per year.)

You should also be aware of what factors could cause a temporary hit to your credit score. Applying for credit cards, personal or auto loans just before, at the same time, or just after applying for a refi will lower your score, albeit temporarily.

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