Refinancing a mortgage can be a great strategic financial move to save money and/or take years off of your mortgage. To make the most out of your refinancing and ensure a smooth process, it's important to prepare and set yourself up for success. Here are 10 tips for a smooth, fruitful refinancing.
1. Check for Prepayment Penalties
To the surprise of many homeowners, some lenders charge when you pay all or part of your mortgage loan off early – a “prepayment penalty.” Check your loan and closing documents to see if you have a prepayment penalty.
2. Know Your Equity
If you’re doing a cash-out refinance, you should know how much equity you currently have in your home. This can be calculated by subtracting your home’s market value by what you still owe on your mortgage. Typically, lenders will allow you to cash out up to 80 to 90 percent of your equity.
3. Strengthen Your Credit Score
Do everything possible to strengthen your credit score before you make your application to refinance as it will help you receive a lower rate on your new mortgage.
4. Avoid Non-Ordinary Purchases Before Closing
Between the time you apply for refinancing and the actual closing, do not make non-ordinary purchases on credit or incur debt. Lenders will do a second credit check just before closing.
5. Lock In Your Rate
When you are ready to agree to a mortgage rate, have the lender “lock in” your rate quote in writing, so that you will receive the rate you expect.
6. Shop Around
Although most people refinance with the original lender, it can be in your best interest to shop around for the best interest rate and lowest fees.
7. Consider Closing Costs
Refinancing can come with a variety of closing costs — application fee, appraisal fee, inspection fee, attorney fee, title search, etc. These costs usually amount to 3-6% of your loan amount, so it’s important to make sure you have cash to cover them at closing.
Some lenders may offer a “no-closing-cost refinance,” in which your closing costs will be waived in exchange for a higher interest rate. Your lender may also allow you to roll your closing costs into your mortgage.
8. Consider Making Home Improvements
Making improvements can increase the lender’s appraisal of your home, which is used to determine whether you get a new mortgage and how large it can be. The best case scenario is that your home is appraised at more than what you bought it for. With this in mind, it can be wise to spruce up your house before refinancing.
If you do make upgrades, it’s important that you’re present for your appraisal, as some upgrades are not obvious. Don’t be afraid to point out upgrades to the appraiser, and, if applicable, provide paperwork like permits, estimates, and receipts from contractors.
9. Ask Questions
If you’re unfamiliar with anything, don’t be afraid to ask questions to your attorney or lender. It’s very important that you’re as informed as possible before signing your loan documents.
10. Be Patient
Sometimes it takes more time than you wish or expect for all of the paperwork to be completed. A refinancing process typically takes between 30-45 days, so take a deep breath and stay patient.
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