There are many reasons why you’d want to refinance your home. Maybe you want to pay off your home faster or use part of the equity you’ve built up to fund some home improvement projects. Maybe interest rates have gone down since you bought your home and you’re just looking to lower your monthly mortgage payment and save some money. Whatever the case may be, you’re going to need a solid plan and a good understanding of your financial situation to accomplish your goal. Here’s how to refinance your home and save money in the process.
Define Your Goal
The first thing you need to do is identify the reason you’re refinancing. That’s because your goals will have a tremendous impact on how you refinance.
For example, if you want to use some of your home’s equity, that will impact the type of mortgage you get (i.e., cash-out vs. no cash-out). If you’re hoping to refinance and then sell in the near future, you’ll need to limit closing costs to make it worth it. If you don’t care about saving month-to-month and just want to pay off your home sooner, it will affect the loan term you get.
Just hoping that refinancing will save you money isn’t going to cut it. Refinancing your home should be a strategic move based on current market factors and your own unique situation. Defining your goal at the outset will help guide your decision-making and ultimately lead to better results.
Review Your Credit History
Your credit score will impact the type of mortgage you get and your interest rate, so it’s important to know where you stand. Many banks and credit card companies offer free credit score checks, and every American is entitled to one free credit report per year from each of the three major credit reporting bureaus: Equifax, Experian and TransUnion. Although these reports do not contain your credit score, you should still request one and review it to make sure there are no errors that could be bringing down your credit score.
Know Your Equity and Home Value
Understanding exactly where you stand on your current mortgage will play a big role in your refinancing. Lenders will often make decisions based on the debt-to-value ratio of your home and how much equity you have. Some lenders will not refinance a mortgage where the home owner has less than 5% equity. If you have less than 20% equity, you’ll likely receive a higher interest rate, have to pay more costly fees and be forced to buy mortgage insurance. You can see the balance of your loan on your mortgage statements, and you can try to determine your home’s value by using online real estate resources to compare your home to similar homes in your area.
Compare Rates and Costs
When refinancing your home, you need to do some legwork to find the best possible deal. Some home owners refinance with the same mortgage company simply out of convenience, but that can be a big mistake. Even a small difference in the interest rate could save you thousands of dollars in the long run. This is especially important when considering “no closing cost loans” as these lenders typically charge higher interest rates, meaning you save money now but could pay back a lot more overall. Take the time to shop around and compare both interest rates and lending fees to get the best deal. And, remember Homes for Heroes mortgage specialists reduce their fees for their hero clients, so register today to see how our mortgage specialist in your community can take care your refinance and save you money in the process.
Compile Your Finances
One thing that often takes people by surprise when refinancing their homes is the amount of paperwork required. Many people think there would be less red tape when refinancing, but in fact, you could end up signing more documents than when you bought the house the first time.
To get through the process, you’ll need to compile all of your relevant financial information, including proof of income, bank statements, tax returns and any information about outstanding loans or other debt. Your mortgage specialist will be able to tell you what information you need to collect to refinance your house.
Prepare for Home Appraisal
As part of the refinancing process, you’ll likely need to have an appraisal done on your house. Talk to your mortgage specialist about any repairs, improvements or other changes that may have increased the home’s value since you bought it. You should also follow best practices for getting your home ready for an appraisal because presenting your home well can increase its appraised value. If you need a little refresher, we have some helpful tips on how to prepare for a home appraisal.
When refinancing your home, you’ll need to pay closing costs in the form of mortgage fees, title fees, appraisal or inspection fees and more. Closing costs on a mortgage refinance often equal roughly 2-5 percent of the loan’s principal, so you’ll need to make sure you have enough cash on hand to cover the cost.
The amount you pay in closing costs is also important in determining whether refinancing your house will even be worth it. This concept is called the break-even point and it essentially works like this: If you refinance your home and save $100 per month on your mortgage payment, but it costs you $4,000 in closing costs, your break-even point is 40 months. That means if you plan on moving in the next three years or so, it wouldn’t be worth it to refinance. Try to determine what your closing costs will be as early as possible to make sure refinancing is really worth the effort.
How to Refinance Your Home and Save
If you’ve done your research, found a good deal on your mortgage, accounted for the costs and created a solid long-term plan, you should hopefully be able to save money when refinancing your home. Even if your monthly mortgage payment doesn’t change significantly, if you shorten your term, you can still save on interest. But perhaps the best way to ensure you save the most money possible is to work with Homes for Heroes.
When you register with Homes for Heroes, you’ll be automatically matched with a mortgage specialist in your area who can help you save on all the costs associated with refinancing your home. They will be your dedicated lending partner, helping you navigate the refinancing process and save you as much money as possible.
Ready to refinance your home and save money in the process? Register with Homes for Heroes and let our mortgage specialists put their expertise to work for you.