You’ve carefully weighed the pros and cons and have decided that refinancing your mortgage is the way to go. You’ll save money in the short term and potentially in the long term, as well. However, you’re not sure where to start or how to refinance your mortgage.
If the property you’re looking to refinance is located in Pennsylvania, PSECU might have the loan that fits your needs. Check out our home loan options to see if one works for you. In the meantime, here’s what you need to know — and do — to get the refinancing ball rolling.
For some homeowners, the first step to take when trying to refinance a mortgage is to focus on improving their credit scores. A lender wants some assurances that they’re making a wise decision in lending you money. One way to gauge how likely you are to repay on time is to look at your credit score. That’s because a credit score is based on factors that include that very thing – paying debt obligations on time. The higher your score, the more likely it is that the lender will want to lend to you.
One of the main reasons people refinance a loan is to lower the interest rate on their mortgage. A lower interest rate means you pay less in interest each month and over the life of the loan. How the interest that you’ll pay is determined depends on where you look for your loan. For financial institutions that do what’s called “risk-based lending,” they base rates on credit scores.
Whether your credit’s never been great, or you’ve always had good credit, it’s still important to check your credit before you apply for refinancing. You’ll want to make sure your credit reports are accurate and understand how your actions can impact your credit report, and ultimately your credit score. Lenders may use a combination of these to determine if they’ll approve you for a new loan.
Before you can set about improving your score, it’s important to understand what goes into a credit score. As mentioned earlier, payment history is a key factor. Other components noted in your credit score include:
You can keep track of your score for free with PSECU. Monitoring your score can help you see where there’s room for improvement. If your score isn’t where you’d like it to be and you want to try to raise it to get the best possible interest rate when you refinance, here are few things you can do:
|Pay off any balances. If you carry a balance on a credit card, paying it off will reduce the amount you owe and may give your score a lift. Keep card usage to a minimum. Don’t charge up to the limit — or anywhere near it — on your cards each month.|
|Pay your bills on time. Whether you make on-time payments or not has the most significant effect on your score. Set a calendar reminder or use Bill Payer so that you never miss a due date.|
|Avoid opening new lines of credit. Opening a new credit card or another type of loan can cause your score to drop a bit. Hold off on getting that new card until after you’ve finished the refinancing process.|
|Check your credit report. Credit reporting agencies do make mistakes. Review your credit report to make sure the information on it is accurate and up to date.|
|Keep card usage to a minimum. Don’t charge up to the limit — or anywhere near it — on your cards each month.|
|Don’t make big changes. Closing or opening new accounts can affect your credit score by impacting the average age of your accounts and other factors.|
If you’re looking to refinance, avoid making any significant changes to your accounts until after the loan is closed. Additionally, if you anticipate making a large purchase or changing jobs during this time, you may want to check with your lender to determine the potential impact on your loan.
After you’ve put some effort into increasing your credit score, it’s time to focus on how much your home is worth and how much equity you’ve built. Generally speaking, you need to have equity in your home to refinance your mortgage. Equity is what remains after you subtract the amount of your mortgage principal from the value of your home. Typically, having at least 20% equity in your home can lead to the best rates. It also means you won’t have to pay private mortgage insurance.
Keep in mind that if your home is worth less than you want to borrow, you might not be able to refinance at all. If your home’s value has dropped since you purchased the property, you may need to wait for its value to recover before you can refinance. Check with your potential lenders about any restrictions they may have in place regarding home value and refinancing.
When you refinance a mortgage, you might get a bit of a déjà vu feeling. That’s because refinancing is very similar to taking out a mortgage in the first place. Take a look at a few of the features you’ll need to choose between when refinancing your home loan and the different types of home loans available:
When you decide to refinance your current mortgage, you aren’t locked into going through your current lender. You have the option of switching to a different financial institution. You may find that changing lenders works in your favor.
That’s particularly the case if you decide to switch from working with a bank to working with a credit union when it’s time to refinance. Compared to a bank, a credit union might be the better bet. Credit unions are not-for-profit, member-owned financial institutions that offer many of the same services as most banks, but for a lower cost.
The benefits of working with a credit union include:
Now for what might be the most pressing issue — how much will it cost to refinance your mortgage? You’ll come across multiple fees and expenses when you refinance, many of which might be familiar from when you got your first mortgage. Learning more about these fees can help you budget and decide whether refinancing is something you can afford to do.
When you consider a lender for refinancing, keep your eye out for fees, such as those listed below. In keeping with our low- or no-fee philosophy, note that some of the fees below are not charged by PSECU at all. Just give us a call if you have any questions.
An essential component of refinancing a home loan is having the paperwork and documentation that shows a lender you’re a viable candidate for a new loan. You’re likely to need a variety of different documents to prove your income, credit, and identity.
While it’s a good idea to check with your lender and get a specific list of what paperwork is needed before you apply to refinance, here’s an overview of what is required:
At this point, you might be ready to jump in and feel confident about the process of refinancing your mortgage. But you might also have a few more questions about the process and whether you qualify or not. Read on for answers to common questions about refinancing a home loan:
If you’re ready to start the refinancing process, PSECU can help. We offer a variety of mortgages for current homeowners and are happy to assist you in choosing the loan that’s best for you. To learn more about how to refinance a home and our home loan options, contact us today.