How to Save Even More Money When You Refinance Your Mortgage
In a previous post we discussed how to prepare for a smooth and successful mortgage refinance. Today, we will cover what you can do to maximize your savings when you refinance your mortgage.
Get the Lowest Interest Rate Possible
Whether you want to get a better interest rate, shorten the term of your loan or simply lower your monthly payment, historic low interest rates have put homeowners in a great position to save even more money when they refinance. However, interest rates are not “one size fits all,” they’re determined by a number of different criteria including credit scores, loan-to-value (LTV) and debt-to-income (DTI) ratios.
Before you fill out a refinance application, or even begin to shop for rates, check your credit score and correct any inaccuracies. A five to ten point change in your credit report can make a significant difference in the rate you qualify for. Most mortgage lenders require applicants to have a credit score of at least 620, but the higher your credit score, the lower your interest rate.
The LTV ratio of your property also has a significant impact on your interest rate, particularly with conventional loans. The historic low rates you often hear advertised are based on homeowners with high credit scores and a LTV ratio of at least 80%, or 20% home equity. If you have a high LTV ratio, there are programs such as the Home Affordable Refinance Program (HARP) that make it possible for homeowners to refinance with little to no home equity.
If your DTI ratio is too high, you are at risk for having your refinance application denied. Under a conventional loan program you must have a DTI of 45% or lower compared to pre-tax income. Before you apply for a mortgage refinance, do not open any other lines of credit and work hard to improve your DTI by paying off any outstanding debts.
Combine a Lower Interest Rate With a Shorter Term
The shorter your loan’s term, the more favorable the rate. A 15-year loan will have a lower interest rate than a 20-year loan, which will have a lower interest rate than a 30-year loan. Although there is a chance that shortening the term of your loan could increase your monthly payment, a shorter loan term will maximize your savings over the entire life of the loan. And, with interest rates near historic lows, a shorter term may not necessarily cause a higher monthly payment.
Shop Around for the Best Rate
Sometimes it can be hard to shop for an exact rate without having crucial information like your credit score, LTV and DTI on hand. Without this exact information, lenders will only be able to give you a rough estimate on interest rates. Some lenders offer low or no-closing cost options for refinancing, so make a point to ask about the related fees and closing costs, as any additional expenses will add to the overall cost of refinancing your loan.
When it comes to refinancing your mortgage, make sure you find a solution that fits within your overall financial plan. If you do your homework, shop around and consider all of your options, you’ll be equipped with all of the information you need to make a financially sound decision and save even more money in the process.
If you are interested in refinancing your current mortgage loan, or have questions regarding what programs you’re eligible for, visit our Refinance FAQ page or call me at 810.494.7141.