With interest rates hitting incredibly low numbers, you might be thinking of refinancing your home. You may be considering whether to choose a 30 year fixed mortgage again with so many options to choose from. Regardless of which type of mortgage you choose, you want to be prepared when you call your lender. Remember when you got your finances in order to apply for your original mortgage? You want to prepare for a home refi in the same way.
What Can You Use a Refi For?
A mortgage refi can pay for a kitchen or bathroom remodel. You can also do something as simple as replacing a home’s windows. A home equity line of credit or a home equity loan are two common ways to refinance. You should prepare for the process can make the approval process smoother. You could even qualify for a lower interest rate on your home loan by improving your credit score. Clearly it is worth it to prepare for a home refi if it is going to save you money by lowering your interest rate! You might also consider whether to change from a 30 year fixed mortgage to a shorter or longer term. Here are some things to do before applying for a mortgage refinance:
Check Your Credit Report
The first thing you should do as you prepare for a home refi is to check your credit report. Federal law allows people to check their credit reports for free each year. Since there are three major credit bureaus—Experian, Equifax and TransUnion—consumers can check with each agency every four months for free.
Fix any errors you find, such as late payments that you have proof of paying on time. Eliminating any errors can improve your credit score. Then you can borrow more money at a lower interest rate.
Pay Down Credit Card Debt
The next step to take as you prepare for a home refi is to pay down your credit card debt. Focus on the credit card bills with the highest interest rates first. If your credit card balances are near your credit limits, pay the debt down. Your goal is debt that is no more than 30 percent of your credit limit. Lenders don’t like to see credit cards that are maxed out or close to it. They may consider you a credit risk if you’re using most of your available credit. Are you serious about taking advantage of those lower interest rates that are available right now? Lower that credit card debt!
Keep your credit card balances low for at least a few months before applying to refinance.
Also save as much money as you can in your savings account. This shows that you can weather a financial storm such as a job loss or major medical cost. Having six months or more of expenses saved is a good goal.
Research Home Values Near You
The final step as you prepare to refi your home is to check out the sale price of homes around you. You may not be able to take advantage of lower interest rates if you owe more than 80 percent of your home’s value. The bank may consider that your home loan to value ratio (LTV) is too high to qualify for a loan refi—or at least at a good interest rate.
The LTV ratio is a lending risk assessment that was done before you applied for your original home loan. The more money you put toward a down payment, the lower the ratio and the lower risk you are considered to be. Buying mortgage insurance can help offset a high risk.
As part of a home loan refinance, a lender will order an appraisal of your home’s value. Your real estate agent can help you prepare for this by giving you a rough estimate based on recent home sales in your area.
If you put down 20 percent toward the purchase price of your home, for example, then you owe 80 percent of its value, giving you an LTV of 80 percent. You could have more than 20 percent equity, however, if your home’s value has risen. If home values have dropped in your neighborhood, then you may want to rethink refinancing for now.
If the bank tells you that your home value is too loan, then ask to see a copy of the appraisal and be prepared to argue your case. When I refinanced my home several years ago, I was appalled by some of the comparable sales that the appraiser had chosen. They were smaller than my home and not the same style. Even more important, the homes chosen by the appraiser were than three miles away from my home in a different school district – and outside the beltway. As you prepare for a home refi, you need to be prepared to be proactive.