Your Complete Guide To Refinancing Your Condo

If you’re looking to refinance your condo, whether to adjust your interest rate or to get access to your home equity, the process may seem daunting. Thankfully, it’s not too different from any other mortgage refinance.  

Let’s walk through the steps to refinance your condo, the reasons why you may want to refinance and the alternatives.

How To Refinance Your Condo

When learning how to refinance your condo, there are a few steps in the process that most condo owners will go through.

1. Check Your Eligibility

There are many factors that influence your eligibility for refinancing your condo. Some factors are related to your personal finances. These are similar to the eligibility requirements of refinancing other types of real estate.

• Credit score: Your credit score can range from 300 – 850 and lenders use it to determine the likelihood of you paying a loan back on time. Most lenders prefer a credit score of 620 for conventional loans. For FHA loans, the minimum can be as low 500, but each FHA-approved lender sets their own credit limits.
• Debt-to-income ratio (DTI): Your DTI takes all your monthly debt payments and divides it by your gross monthly income. Lenders use your DTI to determine if you are in the right financial situation to take on a loan and to see how well you manage payments.  
• Home equity: The amount of equity you’ve built up in your condo can influence your ability to refinance. Ideally, you’ll refinance once you reach 20% equity for your home. You can refinance with lower equity if your credit score is high, but you may receive higher mortgage insurance or interest rates.  

The big difference between refinancing a condo compared to other types of real estate is the influence of the condo owners association (COA). When you buy a condo, you join the COA. It’s similar to a homeowners association, where members are obligated to pay dues and follow the rules of the organization. If a condo owner goes against the rules or doesn’t pay dues, the COA may place a lien on your title. Since the COA has a large influence on the condominium, there are a few ways the COA impacts your eligibility.

• Property maintenance: The COA oversees property maintenance and repairs for common areas. Your lender will want to see that they are upkeeping the property, as maintenance and repairs can impact the financial stability of a condo.
• Reserve funds: Your lender will also want to know what insurances and reserve funds the COA has in case of emergency situations. This helps the lender determine the financial stability of the COA.

2. Check Your Loan Type

Before refinancing, consider the type of loan that you currently have. Your loan type may change the process for refinancing.  

Particularly if you have an FHA-approved condo which can be financed with an FHA loan. FHA loans are insured by the Federal Housing Administration (FHA), so the owners of your mortgage are protected if you default on your loan. Since the FHA backs the mortgage, home buyers can qualify with lower credit scores. Rocket Mortgage^® requires a minimum 580 credit score to qualify for an FHA loan.

With an FHA loan you must pay a mortgage insurance premium (MIP) even after reaching a home equity level of 20%. Due to this, many home and condo owners refinance into a conventional loan once they reach 20% equity in their home. If you’re looking at refinancing your condo and currently have an FHA loan, consider if refinancing into a conventional loan is best for you. In order to refinance from an FHA loan to a conventional loan, Rocket Mortgage requires a credit score of 620 or higher.

If the condo is not FHA approved, then it will most likely be financed through a conventional loan. Conventional loans are not insured by the government, which is why they require higher credit scores than other loans. Conventional loans are typically covered by private mortgage insurance (PMI) which is removable after reaching 20% equity in your home.

Other loan types include Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans. VA loans are only for veterans, members of the military and eligible surviving spouses. VA loans are backed by the federal government, which makes applicants look more reliable to lenders, and often leads to better terms.

USDA loans are offered by the government to property owners in rural areas. It’s intended to assist low-income Americans with poor credit, allowing them to still access low-interest mortgage rates and zero down payments. Rocket Mortgage does not currently offer USDA loans.

If you’re refinancing within the same loan type, the review process may be simplified since you’ve received prior review.

3. Compare Lenders And Loan Estimates

When refinancing, make sure to compare lenders so you get the best lender for you. There are a few ways to decide if a lender suits your situation.

Firstly, consider what type of loan you want. If you are looking for FHA loans, for example, you’ll need an FHA-approved lender. By deciding what type of loan you want, you can narrow down your choices.

You’ll also want to reach out and get multiple estimates from different lenders. Your loan estimate includes the interest rate the company is offering, along with the terms of the loan. You’ll want to compare lenders to ensure you’re refinancing with a lender that provides the best financial situation for you.

Should You Refinance Your Condo?

Much like refinancing homes, there are a variety of reasons that you may want to refinance a condo.

Lower Monthly Payments

One reason is to refinance and give yourself a longer term to pay off your mortgage. This will lower the monthly payment you need to make on your mortgage. However, if you’re extending your mortgage over a longer term, you’ll also end up paying more in interest.

Lower Interest Rates

Refinancing your condo may also lead to lower interest rates. If interest rates have dropped significantly since you took out your mortgage, refinancing may offer lower interest payments.

Using Built-Up Equity

Home and condo owners may also want to refinance to use built-up equity. Home equity is the amount of money a homeowner has paid off on their home after subtracting their current mortgage balance. It represents the amount of ownership that a home or condo owner has in their real estate. Home equity is influenced by the down payment, loan balance and the market value of the home.

To get the most out of your home equity, you may consider a cash-out refinance. This allows you to borrow money against the equity you’ve built up in your home or condo. You can refinance and withdraw some of your equity, typically up to 80%, in cash. Your existing first mortgage will be paid off, and you’ll take out a new larger mortgage. The difference between your first and second mortgage will be paid out in cash.

This allows condo owners to use their home equity to pay for other expenses like loans or renovations with the money they receive from a cash-out refinance.

Alternatives To A Condo Refinance

If a condo refinance doesn’t suit your financial situation, there are a few alternatives to assist with finances, or to provide access to home equity.

• Home equity line of credit (HELOC): A HELOC is an alternative way to access your home equity. It gives homeowners a line of credit based on your home’s equity. There are two periods to your HELOC; the first one being the draw period, where you draw up to the full amount of credit you were approved for. Then there’s the repayment period, when the balance freezes and you’ll pay back the outstanding balance, including interest. HELOCs allow homeowners to only take as much as they need from their home equity, as long as they are able to pay it back with interest.
• Personal loan: Whereas HELOCs require you to have home equity, personal loans are backed by nothing and are unsecured. These require higher interest rates and depend on your credit score and DTI, meaning you need a better credit score to get one. But they allow immediate access to funds, and there’s no equity requirement. If you urgently need funds and know you are in the financial situation to pay back a personal loan, it may be a suitable option rather than refinancing.

The Bottom Line: Refinance Your Condo To Get Cash Or Save Money

For condo owners, the refinancing process may seem scary. But refinancing can provide a lot of financial benefits, allowing condo owners to access their home equity or save with lower interest rates. If you think it may be the right step for you, apply online for a loan refinance to see if you can save on your monthly payments.