Getting Ready to Refinance

Refinancing your mortgage can mean a number of things for homeowners. Doing so can help you reduce your loan's interest rate or your monthly payment, gain access to some of your home's equity, or make changes to the type of loan you have. Currently, the country is experiencing a refinance boom, due to the historically low interest rates, and effects of the pandemic inspiring home renovations. Regardless of your motivation to refinance, there are some steps that you and your family can take to help ensure that the process is as smooth as possible. 

1. Understand Your Credit: Your credit scores and credit history are among many factors that may determine the terms of your loan, such as your interest rate. Maintaining good credit comes with a lot of perks, and if your credit score has improved since you got your first mortgage loan, it could improve your chances of lowering your interest rate upon refinancing. So before you start the application process, be sure to check your credit score and understand your current situation. 

While maintaining your credit prior to refinancing is essential, in the time leading up to your mortgage refinancing, it's imperative you don't apply for new credit cards, loans, or open new credit accounts as well. The mortgage lender will check your credit at the time of application and before closing. If you're hoping to get a new credit card or car loan, wait until after you've closed on your refinance loan to apply for those credit accounts. 

There are a few reasons for this advice: 

● Credit score: Every time you apply for credit, the resulting hard inquiry can knock a few points off your credit score. Depending on where your credit score stands, losing even a handful of points could impact your interest rate on the new loan. Avoid any action that could negatively impact your credit score.

● Debt-to-income ratio: Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. This helps to determine how much you can borrow in terms of your monthly payment. Adding more debt will increase your ratio, and depending on where it was at before the new loan, it could make it challenging to get approved for the loan amount you want. 

● Risk: A mortgage is both a commitment for you and your lender. If you're opening one or more credit accounts during the refinancing process, it could cause a lender to think you're financially unstable. In that case, a mortgage lender may lose confidence in your ability to make your monthly mortgage payments on time and either deny your application or charge a higher rate. 

2. Know Your Home’s Market Value: While real estate sites can be great resources of information, keep in mind that the home value estimates that they post on their sites are just that, estimates. Many homeowners go into the refinance process thinking their property has a higher market value than it really does and later find themselves disappointed. Homeowners looking to refinance should also know their home's fair market value as reported by their local tax commissioner, as well as the market price for recently sold, comparative properties in their area. This will give sellers the best idea of what their home is valued at upon refinancing or even listing. 

3. Prepare your home for the appraisal: Before your refinance loan can go through, the lender will want to conduct an appraisal of your property. Prior to the appraisal, homeowners should thoroughly evaluate their home and make moderate improvements, such as cleaning out the gutters or retouching the paint. All of these can help add dollars to your appraisal value. 

4. Research Lenders: While some borrowers may prefer the simplified option of securing their refinance loan through their existing mortgage lender, different lenders may have different options available. 

Make your final decision based on the numbers. Refinancing a mortgage may seem like a simple process, but it involves a lot of moving parts, including costs and the potential for savings. Take your time through this process to ultimately decide whether it's the right fit for you. At Fort Worth City Credit Union, we love working with our members to find the perfect loan, and with a wide variety of loan programs to choose from, you’re sure to find one that fits your lifestyle.