Refinancing Checklist: 10 Things You Need to Know to Get the Best Rate Possible
Even as low interest rates continue to lure borrowers seeking refinancing or a good home loan deal, lenders are exercising more caution and imposing stricter qualification requirements. If you are in the market to refinance at the best possible rate, here are some factors you should know.
1. Credit Score
Borrowers with high credit scores are usually the ones getting the best possible interest rates. The lower your score, the higher the interest rate. Lenders deem lower credit score borrowers as higher risk loans and, as a result, charge more for that risk. Know your credit score when applying for a loan so that you have the right expectations and can negotiate the best possible deal!
The more equity you have in a home, the less risk that loan is for a lender. The less risk, the lower the interest rate. Typically, those borrowers who are looking for a loan less than 70% of their home’s current value are the ones obtaining the best interest rates.
3. Appraised Value
For borrowers purchasing a home, this is always a key part of the contract negotiations. While most homes appraise for at least the seller’s asking price, there are some properties that are in declining markets and, as a result, appraisals come in lower than anticipated. Think of this as an opportunity to re-negotiate the contract and pay less for the home you want!
For those interested in refinancing their homes, having an idea as to how much your home is worth is one of best ways to prepare yourself for the refinance process. There are many websites that will help you estimate the value of your home. Home Loans Today is a Zillow partner and we see lots of homeowners checking the value of their home on www.Zillow.com.
4. What Mortgage Product is Right for You?
There are many mortgage product options out there and it’s always best to talk to your lender about what product is right for you. The standard mortgage is the 30 year conventional mortgage. This means that is a fixed rate for the entire 30 years of the loan, your payments will never go up, and your principal will be paid down according to a 30 year amortization schedule.
While that’s the right product for many, there are also 10, 15, 20, 25 year fixed rates mortgages for those who want to pay off their home even faster. It is also an option for borrowers to obtain fixed rate loans for just about any term they want. Just about any loan term between 10 and 30 years is available.
Lastly, for more savvy borrowers, consider an ARM loan. They often have lower interest rates for a fixed period of time and offer greater flexibility and cash flow for a disciplined homeowner.
5. Debt Ratios
Debt ratio is an important term in mortgage lending. A debt ratio is the percentage of your gross income that you are obligated to pay for all of your credit obligations. An example is if you make $5,000 a month and your total expenses including car payments, mortgage payments, and credit cards equal $2,000, your debt ratio is at 40%. Most lenders like to keep their borrowers below a 45% debt ratio so ensure we are putting borrowers in homes they can afford!
6. Other Mortgages and Liens
For many years, second mortgages and HELOCs were common solutions for homeowners who wanted to avoid mortgage insurance, consolidate debt, or improve their home. While these loans are extremely useful, it can make the process for refinancing an existing first mortgage a bit more difficult. You will need to help your lender work with the mortgage company who has your 2nd mortgage or HELOC to obtain what is called a subordination agreement. This is an agreement between your 2nd mortgage holder and your new lender to keep the 2nd mortgage in a “junior” lien position. This process can sometimes take up to 30 days to complete, so be aware that this may cause unanticipated delays.
7. Annual Percentage Rate
Your APR is a great way to compare lenders. The APR is your interest rate + all of the fees that are a part of your refinance outside of certain government and title requirements. Comparing APRs will give you a great way to look at who may be giving you the better deal. It isn’t always about the lowest interest rate. Talk to you lender about obtaining all options including a “no point” and “no closing costs” options to make sure you have all of the facts.
8. Beware of Teaser Rates
These days, marketing is everything. Be care of a company advertising a rate that is “Too Good to be True.” Chances are, it is. A lot of lenders these days, will advertise the lowest possible rates just to get you interested in doing business. The truth is that many of these rates are only available by paying discount points to buy down the rate. A discount point is 1% of the loan amount paid to the lender for them to reduce the rate. While discount points aren’t always a negative, you must evaluate the length of time it takes to recoup those costs. Talk with your loan officer about what is best for your situation.
9. Reputable Lender
It is extremely important for borrowers to do business with lenders who comply with all federal and state regulations, put their customers’ interests ahead of their own, and always disclose all rates, terms, and fees clearly and up-front. Home Loans Today guarantees our Good Faith Estimates to ensure you know what you’re getting before you close.
10. Third Party Fees
Depending on which state you are in, the costs of refinancing can vary greatly. There are some states that have very few government recording fees, lower taxes, and lower title insurance rates that make it cost effective even for small reductions in interest rates. Always look at the “Third Party” fees that are being charged in the transaction to ensure you are taking full advantage of any reduction in interest rate. Title Insurance, Government Recording, Appraisal Fees, Lender Fees, etc. are all key in making the right choices during the refinancing process.
It’s important to understand what is involved when considering home refinancing. Let the experts at Home Loans Today guide you through the process of refinancing at today’s lower rates.