4 things to know before refinancing your mortgage
Low interest rates mean now is a great time to refinance. Use this checklist when refinancing your mortgage to make sure you get the best rate. (iStock)
The coronavirus pandemic has affected nearly every part of the economy and the housing market is no exception. Because of the record-low mortgage rates, it’s a great time to refinance your mortgage.
Interest rates began falling in March 2020 after the outbreak of the COVID-19 pandemic. Though they’ve fluctuated slightly in the 10 months since then, they remain low. As of February 16, the interest rate on a 30-year fixed-rate refinance loan is 2.750%. Rates are 2.750% for a 20-year fixed-rate refinance loan and 2.250% for a 15-year.
To see what rates you might be eligible for, visit Credible and compare rates and lenders. You can see the loan options across multiple lenders with just one simple form.
What do I need to know before refinancing?
Make sure to read through this refinancing checklist first because there are a few requirements you’ll have to meet to ensure your refinance application is approved. You should be aware of these four things before refinancing your mortgage:
- Why you want to refinance your mortgage
- Your home equity and loan-to-value ratio
- Your credit score and debt-to-income ratio requirements
- Where your paperwork is
1. Why you want to refinance your mortgage
With many homeowners rushing to refinance their mortgages over the past year, it’s easy to get caught up in the frenzy and assume that you should refinance too. But refinancing isn’t necessarily the right choice for everyone, so it’s important to think about why you’re considering it.
The most common reason to refinance a mortgage right now is to get a lower interest rate. Because rates are so low, many homeowners will save money in the long run by refinancing. Refinancing can also be a way to remove private mortgage insurance (PMI) if you bought a home with less than 20% but now have more than 20% equity in the home.
While a lower interest rate is a huge upside to refinancing, not everyone will benefit from it. It’s probably not wise to refinance for a lower interest rate if you only plan to stay in the home for another year or two. Calculate your break-even date to make sure you plan to stay in the home long enough. Crunch the numbers using Credible's free online tools.
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2. Your home equity and loan-to-value ratio
Before you apply for a refinance loan, it’s important to know where you currently stand. Check your financial records to find out your current home equity and loan-to-value (LTV) ratio. Your LTV ratio is your principal loan balance divided by the home’s value.
Some lenders may require that you have an LTV of at least 80% to refinance your home (which translates to 20% equity). You may still be able to refinance with less equity but you could end up with a higher interest rate or paying private mortgage insurance (PMI).
To see if you qualify for a mortgage refinance right now, you can simply enter some personal finance information into Credible's free online tools.
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3. Your credit score and debt-to-income ratio requirements
When you refinance your mortgage, you’re taking out an entirely new loan. As a result, you have to meet your lender's mortgage borrowing requirements. In general, mortgage lenders require that borrowers have a credit score of at least 620 and a debt-to-income ratio of 50%, since those are the current standards set by Fannie Mae and Freddie Mac.
If you don’t currently meet those requirements, hold off applying for a refinance loan until you can boost your credit score or pay off more debt.
If you're confident in your credit score then insert your estimated score into Credible's free tools to see what kind of rates you qualify for.
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4. Where your paperwork is
When you apply for your refinance loan, your mortgage lender will need to see various documents that verify your financial situation. Documents you’ll need to provide include:
- Pay stubs
- W2 statements
- Tax returns
- Proof of assets
- Proof of debs
- Homeowners insurance
- Title insurance
With Credible's free online tools, you can complete the entire origination process from comparing mortgage rates up to closing. Start the process now.
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Next steps
Because of the low mortgage refi rates, now could be an excellent time to refinance your mortgage and save money.
But before closing on your refinance loan, run the numbers to figure out what your monthly payment will be after refinancing. People often see their monthly payments decrease due to lower interest rates, eliminating PMI or extending the term of their mortgage. If you’re refinancing to a shorter loan term, your payment could increase. Using an online refinance calculator can help you determine your new monthly payments.
If you have questions about the refinance process, visit Credible to get in touch with experienced loan officers who can provide the answers you need. And if you’re ready to shop for rates, Credible can show you the loan options and rates across multiple lenders.