In the US, home refinancing for single- and multi-family homes increased by 150% from 2019 to 2020. That’s more than twice the increase for new mortgage originations. This means more people refinanced existing loans compared to those who took on new loans.
If you haven’t refinanced your own mortgage yet, don’t worry, as it’s not too late. Refinancing rates are still low, but you have to act fast and smart to take advantage of them.
Keep reading as we rounded up the top tips for home refinancing success in this guide.
1. Make Sure You’ll Be Refinancing Your Home at Better Terms
At least 13 million US homeowners could save on their mortgages with a refinance this 2021. If you’re one of these qualified folks, you can save an average of $283 a month by swapping out your home loan with a new one. That’s approximately $3,396 in savings each year!
However, to enjoy such savings, you need to ensure your new loan comes with a lower interest rate. For example, if your current mortgage rate is 5%, your refinancing rate should be lower than that, say, 4%.
You should also check the terms of the refinancing program’s interest rate. That’s because some lenders only offer lower refinancing rates as introductory deals. That lower rate can then go up after a certain amount of time.
With that said, the ideal refinancing program is one with a lower permanent rate. Otherwise, your new home loan may end up costing you more in the long run.
2. Check for Credit Score Improvements
One of the most important tips for home refinancing success is to apply after your credit score goes up. After all, the better your credit score, the higher your odds of getting approved for a refinance. Moreover, the higher your credit score, the more favorable your new loan rates and terms could be.
Considering that the average FICO credit score went up by 8 points to reach 711 in 2020, it’s possible yours did, too. So, your score may have increased enough to bump it from fair to good or good to very good.
Even just a few points higher can already snag you a better refinance deal.
If you’re not sure what your credit score is, you can ask your credit card issuer. Most credit card companies provide this information to their customers for free.
If your card issuer doesn’t provide that service, a credit monitoring company can help. You can go with this option, too, if you don’t have a credit card and still want to know what your score is.
3. Bump Up Your Credit Score
If you find out your credit score hasn’t improved much, you might want to put off refinancing until it does. One way to achieve this goal is to make sure you pay all your financial dues on time. After all, 35% of your credit score is for payment history alone.
As you keep up with your timely payments, consider making bigger payments, too. That’s because your credit utilization rate (CUR) accounts for 30% of your credit score. Your CUR is the total debt you owe, so the lower it is, the less debt you have, and the easier it may be for you to take on new debt.
The improvements can take a few months, but it’s possible to raise your score bit by bit every month. So, if you can wait for about three months to refinance, consider doing so while you boost your credit score.
4. Confirm Your Credit Report Is Clean
Your credit report contains information that can make or break your credit score. These include balances, payment history, credit limits, and types of accounts you own.
For the same reason, any incorrect information on your report can lower your credit score. Unfortunately, such reporting mistakes are common, affecting about 20% of US consumers. This is enough reason to review your report before applying for home refinancing.
The good news is that you can check your credit report for free by obtaining your once-a-year, no-cost copy. Simply head over to Annualcreditreport.com to request the document. Once you have it, be sure there’s no erroneous data there, and if there is, dispute it right away.
5. Improve Your Home While You’re at It
One of the best tips for refinancing your home is to take advantage of the equity you’ve built on it. If you have enough equity, you may qualify for a cash out refinance.
With a cash-out refinance, you can swap your old mortgage for one with better rates and also get cash. You can then use some of the funds of the new loan for home improvements or repairs. In doing so, you can also increase your home’s overall value.
Cash-out refinancing requirements vary, but most lenders require more than 20% equity.
Equity, in turn, is the portion of your home’s value that you’ve already paid and, thus, mortgage-free. So, all those payments you’ve made toward the mortgage principal are part of your equity. This process of paying down debt and building equity over time is what you call amortization.
Do note that your equity remains low during the earliest years of your mortgage. That’s because a bigger chunk of your payments goes toward paying off interest.
For the same reason, you’d start paying more toward the principal after a few years. So, the more interest you pay off, the lower the total interest payments you still have to make. As a result, you’ll start chipping away at your principal, which means more equity for you.
Just keep in mind that with a cash-out refinance, your new loan would be bigger than your mortgage balance. That’s because you’re refinancing your old home loan while also borrowing cash. Still, it may be a good option if you want or need to make home repairs or improvements.
Make Home Refinancing Work for and Not Against You
Always remember that mortgages (including refinances) are the biggest components of household debt. In fact, as of June 2021, these debts amounted to $10.44 trillion.
Now, that doesn’t mean you should no longer apply for home refinancing. However, if you decide to push through, then at least make sure to follow our tips. This way, you can raise your odds of securing a new lower-cost loan with better rates and repayment terms.
Interested in more mortgage and financing guides like this? Then feel free to browse our other up-to-date news and blog posts!