With interest rates still at historical lows, many homeowners are refinancing their mortgages to take advantage of these favorable rates before they disappear. Just how favorable are we talking?
As of March 19, 2013, interest rates are at 3.60 percent for a 30-year fixed-rate loan, according to Mortgage News Daily. This rate is pretty favorable considering just five years ago, in March 2008, interest rates for the same loan terms were at 5.92 percent.
So if you've been hesitant to refinance, now is a great time to take the plunge. But even though the refinancing process is fairly straightforward, homeowners can definitely encounter a few potholes and bumps in the road if they're not adequately prepared.
Fortunately, we talked to a few experts who shared their top tips for making your refinance as seamless as possible, and here's what they had to say.
Tip #1: Shop Around to Find a Trustworthy Lender
If you like to compare levels of service at car dealerships, hotels, and clothing stores, it's a no-brainer to take the same approach when you're refinancing your mortgage and dealing with much higher amounts of money. And Jennifer Hayden, mortgage originator at Gateway Funding Diversified Mortgage Services, LP notes that "it's important to work with a lender that you like and trust."
Emphasis on the word "trust." In fact, doing business with an untrustworthy lender could result in a refinancing process that is anything but seamless. While there are many excellent lenders around the country, the U.S. Department of Housing and Urban Development's (HUD) website warns that there are also lenders who may push homeowners to make unwise - and potentially devastating - refinancing decisions. So what can you do to avoid this problem?
Fortunately, the HUD notes that shopping around is a great way to be a smart consumer and avoid predatory lenders. To find a professional who is a good match for you, Hayden suggests seeking out recommendations from friends and colleagues who've had positive experiences with their lenders.
You can also check with the Better Business Bureau to see if the lender you're considering has been accused of any unfair practices in the past. Working with a mortgage broker instead of a lender directly? You can also see if there were any complaints filed against the broker on The Association of Mortgage Professionals (NAMB)'s website, namb.org.
Tip #2: Be Thorough When Submitting Documents - And Submit Them All At Once
"Generally speaking, the more complete your loan application is, the smoother the process will be," Kahn says. That also means that submitting documents in a piecemeal fashion is not an ideal approach.
Why is it so important to turn in fully-completed documents all at once? If you turn in your information and certain documents are missing, Kahn warns that you could fall into a cycle of having to resubmit newer copies of documents you've already provided - since some have an expiration date.
But your forms aren't the only items with expiration dates. Kahn points out that your interest rate can also expire after a certain period of time. So if you drag your feet when turning in your paperwork, you could lose the rate you locked in earlier.
Hayden adds that all tax returns must be signed and all documents have to be completely legible to move forward with the refinancing process. "The resolution on a driver's license and a passport can deteriorate pretty quickly after it is copied and faxed." So she recommends taking pictures of any forms with small print and emailing those pictures to your lender to ensure that the text is legible.
"Be organized and pay attention," Hayden stresses. Doing so can help you steer clear of common road blocks so you can enjoy the smoothest route to refinancing success.
Tip #3: Avoid Large Purchases That Can Affect Your Debt-to-Income Ratio
So you found a trustworthy lender, submitted all of your paperwork together, and got approved for your refinance. Since you learned that your monthly mortgage payments will be significantly lower than they are now, time to celebrate by buying yourself that new Rolex, right?
Wrong. Hayden points out that "if a borrower makes a large purchase that has a large monthly payment associated with it, then the debt-to-income ratio will go up."
Your debt-to-income ratio is calculated by taking your total monthly debt and dividing it by your gross monthly income. Hayden says lenders usually like to see this ratio remain below 40 percent, so if you make a big purchase that pushes your ratio over that threshold it could derail your refinance.
Hayden points to a situation in which a borrower had a debt-to-income ratio that was right around 40 percent. After she bought a car, however, her ratio shot up to 60 percent and she no longer qualified for the refinance.
Not sure what counts as a large purchase? To be safe, Mark Kahn, director of sales at First Meridian Mortgage, says you should "try to keep purchases under 1 percent of your annual income before and during the refinance process."
Tip #4: Don't Deposit Large Sums of Money into your Bank Accounts
In addition to not making large purchases during the refinance process, you should also be wary of depositing large sums of money. So if you've got a generous relative who wants to help you out with the refinancing costs, it might actually add to the headache - instead of helping it.
Here's why: Hayden says lenders require a paper trail for any account deposits that aren't routine payroll deposits. So, if you received a nice chunk of change from Grandma, you'll not only be required to submit a copy of the check, but you may also need to provide Granny's bank statement.
"Any unusually large deposit into your bank account will have to be sourced for underwriting purposes," notes Kahn. Why is this necessary? Well according to First Commerce Financial's website - a Michigan mortgage broker - this extra step helps lenders protect themselves by ensuring that borrowers aren't getting additional funds from sources like credit cards or new loans.
However, providing all the required documents for these types of irregular deposits can quickly lead to headaches for borrowers and slow down the refinancing process. So whether you're receiving a gift, a work expense reimbursement, or a medical reimbursement, Hayden notes that avoiding these types of deposits altogether will make for an easier refinance.
Tip #5: Don't Open Any New Lines of Credit
So you know a couple basics of a seamless refinance: no new watch or car, and no large monetary deposits into your accounts. Sounds simple enough, but here's one more tip to follow for a stress-free refinance: stay away from all new lines of credit - no matter how minor they may seem. And yes, that even includes store credit cards, according to Hayden.
What's the big deal about signing up for a credit card at your favorite clothing store? Well for one thing, utilizing that new line of credit can affect that debt-to-income ratio we just talked about, Hayden notes.
However, there's another risk. According to the New York City Department of Consumer Affairs, applying for several new lines of credit can have a negative impact on your credit score.
And if you think you're in the clear because you've already gotten approval for your refinance, think again. Kimberly Grim, regional vice president at Fairway Independent Mortgage Corporation, points out that lenders recheck your credit score before the process is complete.
So if a borrower's credit score has decreased since the first credit check, Hayden notes that "the borrower may end up paying a higher rate of interest which may defeat the purpose of refinancing."