Refinancing Your Mortgage: 9 Important Tips to Consider

If you’re a mortgage holder, you understand the potential benefits of refinancing. A low-rate home loan can help you achieve your financial goals and provide various advantages. Refinancing allows you to replace your original loan with a new one that offers better interest rates and more favorable repayment terms. Homeowners often choose to refinance their loans in order to secure lower interest rates, reduce monthly payments, pay off their mortgages faster, or access cash through home equity.

Recent reports indicate that consumer confidence has been on the rise following the COVID-19 pandemic. This positive trend has translated into a significant 29.3% increase in equity during the second quarter of 2021. If you find yourself among the population experiencing a positive equity change, it might be the right time to consider refinancing.

However, it’s important to note that mortgage refinancing isn’t the right option for every homeowner. Sometimes, it doesn’t lead to lower housing expenses or lower interest rates. To help you make an informed decision, here are nine essential tips you should consider before refinancing.

1. Define Your Refinancing Goals Before proceeding with refinancing, it’s crucial to determine why you want to refinance your mortgage loan. Without specific goals and needs, you won’t be able to fully enjoy the benefits of a new loan. Common reasons for refinancing include securing a better interest rate, reducing monthly repayments, eliminating Private Mortgage Insurance (PMI), or accessing your home’s equity. Remember to assess the costs and benefits associated with each goal, as refinancing has pros and cons. Align your financial objectives with your needs to make an informed decision.
2. Prepare for an Appraisal Knowing the value of your home is one of the most critical factors in the refinancing process. The current value of your home plays a significant role in determining the eligibility of your mortgage for refinancing. An independent party will visit your home to assess its market value. This appraised value is then used to calculate the loan-to-value ratio for conventional refinance mortgages. To ensure you receive the best refinance offer, follow these steps:

• Provide the appraiser with receipts and documents from credible contractors to highlight recent renovations and upgrades.
• Enhance the interior, boost curb appeal, and spruce up your yard.
• Respond promptly to any questions from the appraiser and be present during the appraisal if possible.

Always ensure that the home appraisal works in your favor before exploring available refinancing options.

3. Assess Your Equity The loan-to-value (LTV) ratio is a crucial factor in refinancing, as it influences interest rates and eligibility. Your equity is a vital component of this ratio, as it helps lenders evaluate your borrowing patterns relative to your home’s worth. To determine your equity, subtract the outstanding mortgage loan amount from your home’s current value. Generally, a lower LTV ratio is more favorable. Most lenders are unwilling to refinance your mortgage if the loan-to-value ratio exceeds 80%. In some cases, insufficient equity due to a decline in your home’s value since purchase may require you to pay additional fees to proceed with refinancing.
4. Consider Your Future in the Home Before refinancing, it’s important to contemplate how long you intend to stay in your current home. Keep in mind that the process of obtaining a first mortgage is not significantly different from refinancing. You may be required to pay closing fees for mortgage refinance. It’s essential to compare the amount you intend to save through refinancing with the associated closing costs. Although determining the exact duration of your stay in the mortgaged home may be challenging, having even a rough estimate can help you decide if refinancing will save you money or if it’s not worth the effort.
5. Know Your Credit Score Lenders will evaluate your credit score before approving your refinancing loan. Even if you have a good credit rating, you might be surprised to find that you don’t qualify for the lowest interest rates. However, it’s worth noting that lenders typically require lower credit ratings for refinancing compared to new mortgage applications. While most lenders accept a credit rating of at least 620, you can qualify for a mortgage with a credit score of 500 if you opt for government-backed mortgage programs like FHA loans.
6. Evaluate Your Debt-to-Income Ratio (DTI) Lenders assess your DTI to determine if you can afford to make additional debt payments. Many people assume that qualifying for refinancing is easy because they already have a mortgage loan. However, lenders have strict DTI ratios and credit score requirements. It’s generally recommended to spend no more than 28% of your gross monthly income on housing repayments. While some lenders may accept a DTI ratio of 43%, it’s preferable to aim for a ratio of 36% or less.
7. Estimate the Cost of Refinancing To determine if mortgage refinancing is financially beneficial, it’s essential to consider the break-even points. Mortgage lenders often charge upfront fees that can range from approximately 3% to 6% of the total loan as closing costs. Some common refinancing fees include recording fees, reconveyance fees, home inspection fees, processing/underwriting fees, credit report fees, origination fees, and application fees. Borrowers can explore various methods to reduce these closing fees. For example, finding a lender that offers no-closing-cost refinancing may be an option, although it usually results in a slightly higher interest rate. Another approach is to roll over the new loan cost by increasing its principal amount for mortgage holders with sufficient equity. It’s important to compare different offers, as some lenders may assist with refinancing fees.
8. Understand the Impact on Taxes Refinancing can be a useful tool for reducing tax deductions. Mortgage interest deductions have a direct impact on your federal income tax bill. However, some individuals avoid refinancing due to concerns about high-interest deductions during the early repayment period. To avoid becoming a victim of mortgage lending discrimination, you can report any discriminatory practices to the Consumer Financial Protection Bureau (CFPB).
9. Compare Mortgage Refinance Rates Different lenders advertise varying mortgage refinance rates to attract borrowers. It’s crucial to compare interest rates and refinancing points to find the best overall rate. You can select a few lenders with the most favorable rates for mortgage refinancing. This approach allows you to secure a loan with the best terms. Applying to multiple lenders will not negatively impact your credit score. Once you find favorable rates, consider locking in your refinance rates to avoid paying more if national interest rates rise.

The Bottom Line: Find a Reliable Lender for Your Refinance If you’re still considering refinancing your mortgage, these financing tips will help you make an informed decision. Remember that refinancing is a personal choice, and lenders offer various no-obligation tools to assist you in exploring your options. Take the time to run the numbers and ensure it’s the right time and decision for you. Find a reliable mortgage lender who can provide further guidance and help you understand your options thoroughly.