Some homeowners are understandably eager to refinance their mortgage loans and acquire a better rate. But instead of jumping into a refinance too fast, take time to assess your situation to see if now’s the right time to create a new mortgage loan. Lenders use numerous factors to determine the rate on your home loan. Preparing for a re-fi is key to getting the terms you want and deserve.
Know Your Credit Score
Myfico.com is the source to receive your personal credit score. Checking your score before refinancing is imperative because lenders use this three-digit number to determine eligibility and the mortgage rate on the new loan. A large percentage of owners refinance to lower their existing rate, but if your rate doesn’t fall within a certain range, you may not qualify for the most favorable terms. Refinance your mortgage loan when you’ve improved your score to 740 or higher. Pay your bills on time each month to help raise your personal score.
Before a Rate Adjustment
Adjustable rate mortgages can feature interest rates that reset every three or five years, and the new mortgage rate depends on current market rates. Your interest rate can increase, along with your monthly payment. Know the date of your upcoming rate adjustment and speak with a lender to refinance to a fixed rate before the adjustment. A fixed rate prevents future rate changes, wherein you’re able to enjoy unchanging, predictable payments for the remainder of your home loan term.
Increased Home Equity
There’s no rule that says a homeowner has to live in a house for at least two years before refinancing their mortgage loan. However, the longer you wait, the more equity you acquire in the property. Equity is crucial because lenders often require at least 20 percent equity before refinancing a mortgage loan. You can qualify with less equity, but this requires looking into government home programs such as FHA or the Making Home Affordable refinance program.
Refinancing with little or no cash in the bank can present problems because the mortgage process is expensive, and lenders will ask for closing costs on the new mortgage loan. Refinance closing costs are within the 3 to 6 percent range. Borrowers pay these costs on the day the mortgage refinance becomes final. To assist borrowers without cash for closing, lenders can work out the loan to include closing costs in the mortgage loan. However, this method increases the loan balance and the monthly payment.