Most people that refinance mortgage start out with one goal in mind—to obtain the lowest interest rate for which they qualify. People refinance their homes for many reasons. Currently, Americans have the good fortune of experiencing historic low interest rates on 30-year, 15-year and adjustable-rate mortgages. According to a recent report, the average American has lost nearly 40 percent of their wealth. Many homeowners need to refinance their mortgages to try and get their finances back in order.
Common reasons for homeowners refinancing include gaining financial relief from underwater mortgages, lowering monthly mortgage payments, building home equity or all of the above. Some homeowners pull equity out of their homes for vacations or investments. Others desire to refinance into loans with shorter amortization, which build equity faster or correlate the final mortgage payments with retirement plans.
Depending on your personal circumstances, many homeowners who want to refinance mortgages have a number or options compared to several months ago.
1) Save Money: Your personal circumstances ultimately determine the closing costs for a mortgage refinance. Expect to pay closing costs in the range of two to six percent, which may include application fee, loan origination fee, points and private mortgage insurance. This amount does not include prepayment penalties or other costs associated with paying off your loan.
Borrowers planning to refinance to mortgages with shorter terms, may need to pay down their mortgage balance to lower the debt-to-income ratio to quality for a 15-year or 20-year fixed-rate mortgage. A recent survey by Freddie Mac reveals 21 percent of mortgage refinances approved during the first quarter of 2012 required borrowers to bring cash to the closing table.
Some mortgage lenders offer programs that allow borrowers to roll closing costs into their new loans. Other lenders market “no-cost” refinancing to borrowers willing to pay higher interest rates.
2) Pull Credit Report: Order your credit report and find out your credit score. The Fair Credit Reporting Act entitles you to one free credit report a year from each three major credit bureaus Equifax, Trans Union and Experian. You can pay a fee to learn your credit score. Review the report for inaccuracies and errors. Correct mistakes or have outdated information removed immediately.
3) Build a Higher Credit Score: You will need a credit score of 740 or higher to obtain the best terms on a conventional mortgage refinance. Generally, borrowers need a credit score of at least 620 to meet minimum underwriting standards. Qualifying credit scores vary between mortgage lenders.
The following steps can help raise your credit score: reduce your debt-to-income ratio by paying down the balances on credit cards or department store accounts, pay bills on time and avoid buying a car or making other major purchases. Do not fill out numerous credit applications before applying for a mortgage.
4) Determine if You Qualify for Federal Refinance Programs: The federal government has a few mortgage refinance programs available to eligible borrowers, including the FHA streamline refinance program and Home Affordable Refinance Program or HARP. Starting June 15, eligible FHA borrowers who qualify for an FHA streamline refinance mortgage pays lower upfront fees for mortgage insurance payments, as well as lower fees for monthly mortgage insurance payments.
HARP applies to borrowers who have mortgages guaranteed by Fannie Mae or Freddie Mac. The Federal Housing Finance Agency removed the 80 percent loan-to-value-ratio and other impediments during the last round of revisions to the mortgage program. The new eligibility, criteria make millions of borrowers potentially eligible to refinance their mortgages.
5) Gather Documents: Most mortgage refinance will require documentation of employment and resources, including include the two most recent paycheck stubs, last two years W2s and tax returns, and bank/investment statements from the last three months. Mortgage lenders appreciate when borrowers submit complete documentation, which helps speed up the loan approval process.
6) Shop and Compare: Start the quest for a mortgage refinance with your existing lender. Negotiate your best terms for a mortgage refinance. Try to get the bank to eliminate the application or loan origination fees. You can also try to negotiate refinance charges, such as survey, title or inspection fees. Make sure your lender understand that you intend to shop around for the best mortgage refinance terms.
Even if you plan to refinance an FHA-insured mortgage or a loan insured by Fannie Mae or Freddie Mac, it works to your benefit to have banks and mortgage brokers compete to fund your loan and make their best terms available to you.
7) Lock in Interest Rate: It takes from 30 to 60 days for lenders to process mortgage refinance applications—some banks take longer. Most mortgage lenders provide an interest rate lock of 30-days to 45-days. Having all your documentation at the time you submit your loan application can keep you from having to pay for a rate lock extension.
A mortgage refinance represents one of the most important financial transactions you will ever make. Gather information about loan products and educate yourself on your refinancing options. Write down questions to ask each lender about available loan products, interest rates and closing costs. Write down responses and make other notes as necessary. Use the lender responses and notes to compare features for similar products and help you make the right decision for your circumstances.