Considering a Refinance? 6 Ways to Prepare — and Help Your Chances
It’s a great time to refinance. Mortgage rates are hovering around record lows, home prices are rising (hello, increased equity!), and just about all of us could use a lower payment and fewer costs these days.
These are just a few of the many perks that come with refinancing — a trend that’s up 59% over a year ago. In fact, according to the Mortgage Bankers Association, refinances accounted for almost three-quarters of all mortgage activity in the last week of January.
If you’re thinking of hopping on the bandwagon and refinancing your existing mortgage loan in the coming months, it could be a smart move.
What you can do to start prepping today if you’re considering a refinance
1. Understand your current loan (and its interest rate).
The first thing you should do before even considering a refinance is to look at your existing loan. Pull out your closing paperwork, log into your loan servicer’s online dashboard, and get all the numbers in front of you.
How much do you have left on the loan? What’s the interest rate? How many years until you’ve paid it off? What’s your monthly payment? You’ll need to know all these details before you determine if refinancing’s a smart move for you.
2. Prep your credit when considering a refinance.
To get the best interest rate on your refinance (or even qualify in the first place), you’re going to need good credit. Pull your credit report through one of the main credit bureaus (Equifax, TransUnion, or Experian) to access your score.
If you see a lot of late payments or overdue bills, you’ll need to address these before really considering a refinance. You should also work on paying down debts, too, as this will increase your credit score.
3. Study up on home values in your area.
Your home’s value will impact your refinance in several ways. First, if there’s enough discrepancy between its value and your loan balance, you may not need an appraisal. This can speed the process up and make your refinance much easier.
The value of your house will also influence how much cash you can take out (if you choose a cash-out refinance). The higher your value and the lower your loan balance is, the more cash you can likely access.
4. Consider if you’ll need a cash-out or traditional refi.
There are two primary types of refinances: the rate-and-term refinance and the cash-out refinance. With a rate-and-term refinance, you’re simply looking to change the interest rate, the loan term, or both. You’d do this to either lower your monthly payment, reduce your long-term interest costs, or pay off your loan sooner.
A cash-out refinance, on the other hand, allows you to turn your home equity into cash. Here’s how it works: You’ll take out a larger mortgage loan than you actually need, and use that loan to pay off your existing mortgage balance. Then, you’ll take the difference between those two amounts in cash.
For example: If you have $150,000 left on your current loan, you might refinance into a $200,000 mortgage and take the remaining $50,000 out in cash. You could then use the money to pay for home renovations, your child’s college tuition, or even a much-needed vacation or new car. You have a multitude of options.
5. Research interest rates and lenders.
Finally, you’ll need to do some market research if you’re considering a refinance. What are average interest rates and how do they compare to the rate on your current loan? Both Freddie Mac and the Mortgage Bankers Association are good sources for this info.
You should also start looking at potential mortgage lenders. While you might be refinancing, you are not required to use the same lender you did on your original loan, so be sure to cast a wide net. You’ll want to compare each lender on reviews/service, ease of application, loan products, and, of course, the rates and terms they offer you.
6. Think about your long-term plans.
Refinancing comes with closing costs, just as your initial mortgage loan did. So for a refinance to be worth it, you’ll need to reach the breakeven point — or the point at which the benefits outweigh the costs of the loan.
If you’re not sure where you’ll be two years down the road or you know you’re not quite in that forever home, refinancing may not be the best option. (It could be, you’ll just want some advice from a mortgage pro before moving forward.)
Considering a refinance and need more guidance?
If you’re considering a refinance, reach out to an Embrace Home Loans team member in your area. They can answer any questions you may have, as well as walk through the options that match your goals and budget.