What to Expect When You Refinance
The decision to refinance is usually caused by more than just a desire to save a few bucks a month. There’s likely some specific reason why you need or want to free up room in your budget. Perhaps you’re starting to feel the oppressive weight of high-interest debts. Perhaps you’ve got a kid going off to college next year, and haven’t quite put away enough. Maybe you just want to fix the place up, but don’t want to touch your savings.
Whatever the underlying reason is, refinancing a property can be a satisfying experience if you know what to expect up front.
The process begins with a simple application. The purpose of the application is to evaluate whether or not refinancing is appropriate for your situation. The most important qualification factors are: home property value, credit score, overall debt-to-income ratio, and number of mortgage late payments. There are many other factors involved, but these four factors are the make-it-or-break-it items that you should address before you start your refinance.
Home Property Value
If you chose your property well, you bought a great home in a growing neighborhood where all the properties are increasing in value. But, even if you didn’t choose well, if you’ve been paying down your mortgage faithfully, you have equity in your property. Equity is the difference between what you still owe on the property and what it’s worth now. The bigger this number is, the higher the potential to lower your payment, take cash out, or even both. If property values plummet next year due to the Covid-inspired economic slush, you’ll want to look into refinancing sooner rather than later. Appraisal values have already started to drop, but you still might be able to secure a lower interest rate. If that’s your situation, it’s worth it to see how much money you can save with a lower rate.
If you want to argue that credit scores are stupid, believe me, I hear you! However, there are few things more powerful in terms of saving you or costing you money than that little 3-digit number. Supposedly, the credit score determines how likely you are to repay your debts. So, of course, any bank is going to want to increase their chances of getting repaid. There are three credit bureaus – Transunion, Equifax, and Experian. Each credit bureau has their own formula for determining the score. If you’re married, the lender will base your rate on the lower of the two scores.
The best interest rates usually require a credit score of 680 and above – but the higher the better. If you’re over 720, you’re in a really good position. However, if you’re not in that category, don’t despair! Many brokers have programs that allow for credit scores as low as 500. If you have enough equity to take cash out, your best bet is to take the cash, pay off debt, raise your credit score, and then refinance again once your credit score is where it needs to be. This will give you the best payment in the shortest amount of time, thus potentially saving you thousands of dollars in interest. Also, paying off your debts quickly, and raising your credit score, will save you money in other areas – from car payments to credit cards to utility deposits.
Debt-to-income ratio, called DTI, is extremely important. In my opinion and experience, this has a lot more to do with one’s ability to repay a loan than a credit score, but they often go hand in hand. When you’re being evaluated for a refinance, it’s not only the mortgage payment that matters. The lender will look at the total monthly payments on all of your debts, and divide this number by your total gross monthly income. So, for example, if you have a $150 Mastercard payment, a $400 car payment, your mortgage is $1100, the minimum monthly on your KOHL’s card is $35, and you make $4,000 a month, your current DTI is 42% ($1,685/$4000). The lower your DTI the better. The highest it’s allowed to be, and this is only for government loan programs, is 57%. However, if you’re taking cash out for debt consolidation, they look at what your DTI will be once those bills are paid off through the refinance.
Mortgage Late Payments
The biggest thing I can say about paying your mortgage late is – don’t. “Late” is defined as 30 days or more. If there’s any possible way to pay those people, please do. In the current environment, there may be government relief options to help. But, normally, when you go to refinance, having late mortgage payments over the previous 12 months puts you into sub-prime territory. If you’re doing it for debt consolidation, it’s usually still worth it, though your rate will definitely be higher. Then, as I mentioned before, you can pay off debt, raise your score, and qualify for a better rate in a few months’ time. But if you can avoid such a scenario, you’ll be happy you did.
If you’re thinking about refinancing this year, please address these four items before you begin the process. If you do, the chances of it going quickly and smoothly are much higher. If you’d like a free consultation, please contact me. If you’ve done your homework and are ready to start the process, please use the secure link below.
Peace and love, and have a blessed week,