How do You Prepare for a Home Loan Refinance?
When considering the pros and cons of refinancing your current mortgage, it may feel a little like venturing into an uncharted financial wilderness. However, by following the Boy Scout credo to “be prepared” you will reveal those shadows to be easily surmountable rocks and trees.
Before you ever fill out a new mortgage application, there are some simple, preliminary steps to streamline the process. Grab a flashlight and follow us…
Mind Your Motivation
Even if you have the basic inclination of taking advantage of lower interest rates and growing equity, it’s a good idea to examine your objectives for refinancing and determine, well, what’s in it for you. The most obvious benefit is saving money by lowering the monthly payment. This can be accomplished through a lower interest rate or eliminating the required mortgage insurance (PMI) from your original loan.
Refinancing an existing adjustable rate mortgage (ARM) into a fixed rate program can ensure financial stability, especially if you plan to stay in the home for more than a few years. Likewise, if you’re planning ahead and you’re in the position to increase your monthly payment, then you can save thousands by refinancing into a shorter termed mortgage; 20, 15 or 10 years.
The most popular objective for refinancing is to take cash out of your home. By taking the difference between your home’s increased value and a new loan, you can use those funds to consolidate debt (ultimately saving money), make home repairs and improvements (further increasing the value when it’s time to sell), or for important, possibly urgent expenses like medical or education-related.
Crunch the Numbers
With the financial objective and type of refinance established, it’s time to do the math. Take a look at your latest mortgage statement and review the current interest rate, balance of principal, and maturity date. Calculate an estimated value of your home based on recent, comparable neighborhood sales.
These are the figures the bank or mortgage lender will use to determine the LTV – or loan-to-value ratio. The ideal ratio is 80/20, with your home equity meeting the 20% requirement, but that amount varies by lender.
Closing fees on most refinances are in the range of 2 to 5% of the loan, so you’ll want to calculate the length of time you’d need to stay in the home to reach the breakeven point. Lenders will also want to make sure you can afford the new loan which brings us to your credit profile.
Your FICO and Financial Picture
Most Americans are aware of the importance of a strong FICO score when borrowing money for any large purchase. The rating firm compiles information from three main credit bureaus and consists of five elements: payment history, amount owing, length of credit history, new credit, and credit mix. While the range between 670 and 739 is considered “good,” many mortgage companies can and will work with homeowners falling below that.
But before a lender checks your numbers, it’s smart to review your own credit report card first. By doing this in advance you can find possible mistakes on your history that can be rectified, as well as work to increase your score by improving your DTI – or debt-to-income ratio. By reducing your debt, even a little, a higher score can garner you a better interest rate.
It’s also important to avoid those shiny new credit card offers because new applications may have a negative impact on your score.
The Paper Chase
Since you’ll need much of the same documentation that was required for the original mortgage, there won’t actually be much of chase involved! The basics you’ll need to provide include:
• Proof of employment and income – usually two years of W2s and recent pay stubs. P&L statements or 1099s for the self-employed and contractors.
• Two years of personal tax returns; business returns for owners.
• Two months of bank statements.
• Additional assets that may include savings statements, CDs, stocks, 401Ks, or IRAs.
• Proof of alimony or child support payments which may include divorce decrees.
• Additional documents of obligation beyond your credit report such auto loans, medical bills or student loans.
It can only benefit you to be responsive to any further requests from your lender to expedite your refinance, such as explanations for employment gaps or unusual credit dings.
In order to determine your home’s current value – and ultimately the equity that’s accrued – a mortgage lender will order a professional home appraisal. Although you can’t do anything to alter the age or size of the property, you can be proactive as to the condition before evaluation. Take care of any minor repairs such as broken windows or holes that need patching. Clear out the clutter and make sure all smoke and carbon monoxide detectors are in working order.
If you’ve made any significant improvements since purchasing, be sure to itemize and document for the appraiser so they can factor them into the value.
Are You Ready for Your Home Loan Refi?
Navigating the refinance process really doesn’t have to be intimidating when proceeding with a little research and preparation. Our team at EnTrust Funding (ETF) is always ready to further illuminate your path to more solid financial ground. Contact us today to discuss the possibilities!