10 Top Tips For Refinancing Your Mortgage

Refinancing allows homeowners to trade in their current mortgage for a new one – typically with more favorable terms. Certain types of refinances, such as a cash-out refinance, allow homeowners to remove equity from their home and use it to pay off debt, fund home improvements or invest in another worthwhile cause.

While a refinance can sound like a good idea, homeowners should take several considerations into account before refinancing their home loan. Up next, we’ll uncover some important tips for refinancing your mortgage.

10 Mortgage Refinance Tips

Whether you’re just beginning to consider refinancing your mortgage or you’ve already decided you’re moving forward, keep the following in mind to help the process go as smoothly as possible.

1. Determine Your Refinance Goals

The first step a homeowner should take when thinking about a refinance is to lay out some goals for refinancing. Since refinances come in several forms, identifying your reasons for refinancing can help you choose the right option to achieve your objectives. Often, homeowners refinance their mortgage because they want to:

• Lower their interest rate: If rates have come down since you secured your mortgage, you can likely secure a more attractive interest rate by refinancing.
• Lower their monthly payments: Lowering your interest rate or changing to a longer loan term can help you lower your monthly mortgage payment.
• Eliminate private mortgage insurance (PMI): If you have a minimum of 20% equity in your home after refinancing, you can eliminate private mortgage insurance. This is only possible if your new loan is a conventional loan, however.
• Take cash out: A cash-out refinance lets you borrow from the equity you’ve built in your home.

2. Check Your Home’s Equity

Another key piece of information to know before refinancing is the amount of home equity you currently have. Your home’s equity can impact whether you can refinance and the interest rate you qualify for. And if you’re considering a cash-out refinance, your home equity will determine how much you can borrow.

To find out your home equity, subtract your loan balance from your home’s value.

3. Check Your Credit Score And DTI

Refinancing your mortgage requires a hard credit inquiry just like a home purchase loan, so having a good understanding of your financial profile beforehand will help you gauge your options. You’ll want to know your:

Credit Score

When you refinance, lenders use your credit score to help determine your interest rate. If you have poor credit, it’s probably worth raising your credit score before you proceed with refinancing so that you can lock in a more favorable interest rate.

Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is how much you spend on monthly debt payments divided by your gross monthly earnings. Maximum DTI requirements vary by lender, but lenders prefer this percentage be as low as possible.

4. Compare Lenders

Consider getting multiple quotes from lenders when refinancing your home. While filling out an application will negatively impact your score with credit bureaus, this will only happen once in a 15 – 45-day period. So, don’t be afraid to compare quotes and see which lender will give you the most favorable loan terms.

5. Be Prepared To Lock In Your Interest Rate

If interest rates are low or you’re concerned about interest rates going up even more, you should start your refinance application as early as possible to lock in your interest rate as soon as your lender approves your refi loan. This is especially important if your goal in refinancing is to lower your monthly payment. Locking in the lowest interest rate that you qualify for is critical to keeping your monthly payments down.

6. Know The Costs And Fees Involved

Just like with a traditional mortgage, closing costs come with the territory when refinancing a home loan and usually make up 2% – 6% of the total loan amount, or $5,000 on average. The exact fees a borrower will pay when refinancing vary from lender to lender, but these fees often include:

• Application fees
• Title services
• Appraisal fees
• Underwriting fees
• Tax service provider fees
• Government recording costs
• Attorney fees

If you’re looking to save on closing costs, some mortgage lenders provide a “no-closing-cost” refinance, which often involves accepting a higher interest rate as a tradeoff for having your closing costs eliminated. Or, you might choose to roll the closing costs into your loan, which increases your principal loan balance.

Other times, lenders may waive certain fees altogether, so be sure to compare closing costs when evaluating lenders.

7. Prepare Your Home For An Appraisal

Most refinances require having a new home appraisal done to establish the current value of your home. The amount your home appraises for can impact your refinance offer, so it’s important to present your home in the most favorable way possible. Before your refinance appraisal, you may want to:

• Mow your lawn and tidy up your home’s exterior
• Do some light cleaning inside
• Set the thermostat to a comfortable temperature
• Show your appraiser the receipts for any upgrades you’ve had done

8. Understand Any Tax Implications

If your refinance results in you paying less in interest for your mortgage, be sure to understand any impact this will have on your taxes. You may not be able to claim as high of a deduction on your mortgage interest.

9. Respond To Lender Inquiries Promptly 

Throughout the refinancing process, always respond to lenders’ questions and requests as quickly as possible to keep the process running smoothly. You may be asked to provide additional financial documentation during the underwriting process. Refinancing a home usually takes an average of 30 – 45 days, and responding to your lender promptly can help to keep everything on track.

10. Know Your Break-Even Point

Your break-even point is the moment when you’ve recouped in monthly savings the amount of money you spent on your refinance. This number should be an important factor in deciding whether a refinance is best for you. For example, if your refinance costs $2,500 and you’re saving $150 a month on your monthly payments, it’ll take you 17 months to save the money you spent. If you don’t think you’ll remain in your home for that length of time, refinancing probably doesn’t make sense.

FAQs About Refinancing

What should you not do when refinancing?

A major pitfall when refinancing your home is a lack of research. Whether it’s comparing lenders or taking the time to calculate your break-even point, make sure you do your due diligence before making any important decisions about your mortgage. You’ll also want to avoid doing anything that changes your financial profile during the refinance process, like getting another loan or missing your credit card payments.

How much does it cost to refinance your home?

You can expect to pay 2% – 6% of the total loan amount in closing costs and fees when refinancing your home.

How do I know if refinancing is worth it?

Each homeowner should carefully consider various factors, including their goals, break-even point, interest rate, closing costs and tax implications when deciding if it’s worth it to refinance. 

How often can I refinance my mortgage?

You’re not legally limited in how often you can refinance your mortgage, though lenders will want you to meet their requirements each time you refinance. Also, refinancing too frequently can impact your credit score in a less-than-positive way.

The Bottom Line

Refinancing your mortgage loan can benefit you by helping you lock in a lower interest rate or lower your monthly payment amount. But even with these advantages, refinancing can be a complicated process. Let the tips outlined above be a guide as you begin the refinance process or consider whether to pursue a refi at all.

Ready to get started on your refinance? Start your application online with the Home Loan Experts at Rocket Mortgage^®.