Refinancing isn't always successful for everyone, but if you're doing it right - it could really pay off in the long run.
One of the most important first steps to a successful refinance, for example, is finding the right lender. And that might take some legwork on your part.
"Each lender can have different rules," says Todd Huettner, president of Huettner Capital, a residential and commercial mortgage broker. "So while you may not be able to get a loan with one lender, you may be just fine with another."
Want to find out what other steps are necessary to a successful refinance? Keep reading to find out.
Tip #1 - Do Your Homework
You know those great rates you see in ads? Well, don't get too excited just yet, because those low rates may not apply to you.
In fact, "Advertised rates are typically for the best profiled borrowers that have high FICO scores, low loan to values, and single family homes," says Amy Tierce, regional vice president of Fairway Independent Mortgage.
That's why she offers this warning: "Any rates quoted before someone has reviewed your credit can change dramatically."
So, before you start shopping around for a loan, it's important that you do your homework beforehand and understand what rates you can actually qualify for.
Another thing to keep in mind when researching loan options is the goal of your refinancing, according to Malcolm Hollensteiner, director of retail lending sales and production at TD Bank.
For example, do you want more money in your checking account at the end of each month, or the chance to pay off debt faster?
"[These types of questions] will affect the type of loan you should be going after," says Hollensteiner.
Tip #2 - Choose the Right Loan for Your Needs
When it comes to refinancing your mortgage, not all loans are the same.
This is precisely why Hollensteiner recommends asking yourself these two questions before refinancing:
- How long do I plan to live in the home?
- What monthly payment can I afford?
The answers to these questions will help you decide what type of mortgage you need, how long it needs to be, and what type of payment you should be looking for.
For example, most people choose fixed-rate mortgages (FRMs) for the security of knowing that their rate and monthly payments will never fluctuate, says Scott Valins, a multi-state licensed senior mortgage consultant with East Coast Capital in New York City.
On the other hand, adjustable-rate mortgages (ARMs) are loans whose rates are typically fixed for five, seven, or 10 years, but can be adjusted after this period, according to Valins. Why is that important? Because the initial rates for ARMs are lower than FRMs and can therefore be appealing to some refinancing applicants.
For this reason, Valins says that "A homeowner who is certain that he won't need a mortgage for longer than five to 10 years because he's going to sell their home will benefit from the lower rates of an ARM."
Tip #3 - Shop Around for Rates and Lenders
When it comes to refinancing, you should always shop around for the lowest rates and best service. In fact, Tierce says that you should put as much emphasis - if not more - on your choice of lender as you do on rates.
"Shopping for integrity, honesty, trust, and professionalism is more important than costs - as long as the differences are not crazy," says Tierce. She recommends shopping for a mortgage lender the same way you would shop for any other professional, including your attorney, accountant, or doctor.
So when shopping for a lender, get some background on the company and the person before you sign anything.
"Each individual homeowner needs to identify what matters most to them and then shop around to find the lender that best provides it," says Hollensteiner.
If securing the best rate is your number one priority, then you should compare rates, says Hollensteiner. If an on-time, hassle-free closing is the focus, then look for a lender who puts guarantees in place to ensure a simple and easy process.
Tip #4 - Check Your Credit Score
When it comes to having a successful refinance, your credit score is extremely important.
Here's why: "First, if your credit is not high enough, you may not qualify for the loan you want/need or you may not be able to get a loan at all," according to Huettner.
And even if your credit meets the minimum requirements, a lower credit score can cost you thousands in higher fees, interest, and mortgage insurance rates.
So, before refinancing, make sure that your score is high enough to help you benefit from the process.
But what exactly is considered a good or high credit score?
"With a FICO score of 740 and above you are eligible for the best rates," says Valins. Then it moves accordingly: 739-720; 719-700; 699-680; 679-660. The lower the score the higher the rate, he adds.
And if your credit score happens to fall in the low range, then your best bet is to find a mortgage expert to help you determine which loan options work in your favor, according to Huettner.
Tip #5 - Be Aware of the Refinancing Costs
Unfortunately, there's more to refinancing than just what you pay every month. And if you want to have a successful refinance, you should consider refinancing costs, prepayment penalties, and any other extra fees a lender can charge you.
According to a mortgage guide published by the Federal Reserve System, which oversees national monetary policy and banks, refinancing could cost anywhere from 3 to 6 percent of your outstanding principal. Costs could include:
- Application fee
- Loan origination fee
- Appraisal fee
- Inspection fee
- Attorney review/closing fee
- Homeowner's insurance
- Title search and title insurance
- And more
With this in mind, "It's important to compare how much money one will save each month from refinancing to how much it will cost to complete the refinance," says Valins.
Tip #6 - Always Read the Fine Print
In order to have a winning refinance, you'll want to follow two basic rules:
- Know what you're paying for
- Don't sign anything you don't understand
One thing you'll want to carefully review, for example, are details on the lock period. Your lock period is the time - usually between 30 and 60 days - in which the interest rate in a pending mortgage loan cannot be changed.
"However, many lenders cannot get a refinance transaction closed in under 60 days," says Tierce.
So, before you sign or pay for anything, you'll want to find out what happens to the rate if the loan does not close on time.
Ideally, you should find wording that guarantees your rate even if the lender cannot get the loan closed within the rate lock period.
Tierce also reminds homeowners that the estimate you receive on fees and closing costs are just that - an estimate. So, before you sign anything, make sure you check what the actual fees are.
"Tell the lender you want full fee disclosure in writing," says Tierce.