Tips & Rules of Thumb for Refinancing
Refinancing a mortgage loan involves following specific rules. Lenders will refinance a mortgage loan to help borrowers save money on interest and reduce the monthly payment. However, mortgage lenders are generally cautious and will only refinance if a borrower meets the requirements for a new loan.
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Credit Tips
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Improve the chances of qualifying for a mortgage refinance by raising your personal credit rating. Credit affects a mortgage loan in numerous ways. Lenders evaluate credit scores to determine eligibility, and scores contribute to a low mortgage rate on the refinance. To increase a credit score to 740 or higher, never miss a payment or send in a payment late. Lowering your consumer debt by paying down credit card balances and other loans also helps.
Evaluate Equity
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Wait until the property has gained at least three percent equity before applying for a refinance. Homes should ideally have at least 20 percent equity, which helps you qualify for a conventional mortgage refinancing. But if you don't have this much equity, FHA mortgage loans are an option because these lenders offer refinances with only three percent equity. A professional home appraiser selected by the home loan lender will evaluate your home's value.
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Documentation
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To refinance a home loan you must complete a new mortgage application and get the application approved. You'll have to provide your lender with your most recent tax returns, employment pay stubs and banking statements. Failure to provide this information can trigger a rejection. Have these documents ready to show your lender. If you're self-employed, anticipate providing tax returns from the previous two years, as well as a year-to-date profit and loss statement.
Settlement Fees
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Refinancing a mortgage loan isn't free. The lender will require an application fee before evaluating your request. Once approved, you'll need to pay closing costs, which can total five percent of the loan balance. There are ways to deal with this expense. You can pay the cost with your personal funds, or negotiate with the mortgage lender to finance the settlement fees into the loan balance. This reduces the amount you'll have to pay out-of-pocket at closing.
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