Is it time to refinance your mortgage? 5 ways to prepare.
With mortgage interest rates fluctuating daily, an excellent opportunity to refinance your existing loan may appear quickly and take you by surprise.
Since the refinance process can take four to six weeks from start to finish, smart homeowners do the prep work ahead of time so they're ready to act whenever that opportunity presents itself.
5 steps to prepare to refinance
You can keep in touch with a lender while you get ready to refinance, or you can use a DIY approach and wait to contact a lender until you're ready to apply. Either way, here are five specific things you can do on your own before you decide to move forward with a refinance.
1. Monitor how much equity you have
Your home equity is equal to the current value of your home minus the total outstanding balances for your existing home loans. These may include not only your principal mortgage but also a home equity loan or home equity line of credit (HELOC) if you have one.
While you may be able to refinance with no equity, having at least some should give you more choices of refinance loans. Equity is also a key factor in whether you'll have to pay for mortgage insurance or be able to cancel your existing mortgage insurance when you refinance.
2. Check your credit reports and credit scores
Whenever you get a new home loan, raising your credit scores could help you qualify for a lower rate than you would otherwise be offered.
One way to raise your credit scores is to obtain copies of your credit reports, review them for errors and, if you find any, ask the credit bureaus to correct their records. You can request your credit reports free of charge at AnnualCreditReport.com.
Other tips to keep your credit scores healthy include making all of your payments for your credit accounts on time every month and not utilizing all of your available credit.
3. Monitor your debt relative to your income
One way lenders evaluate homeowners' creditworthiness is to compare their monthly debt payments to their monthly income. Examples of debt payments include home loans, auto loans and credit cards, among others.
Paying off debt and keeping your total monthly payments low relative to your income may affect the types of loans you could qualify for, how much you'll be able to borrow, the rates you'll be offered and your ability to manage your new payment.
4. Keep an eye on mortgage rates
Mortgage interest rates can — and do — fluctuate often. While you don't have to check mortgage rates every day, you want to stay up-to-date about the overall level and direction of rate movements as you get closer to the day you decide to refinance.
A mortgage lender can keep you informed about current rates, or you can follow rates yourself by reviewing weekly reports, periodic rate forecasts, or reading the meeting summaries and statements from the Federal Reserve's Federal Open Market Committee (FOMC). The FOMC doesn't directly set the rates borrowers pay, but its actions and commentaries can offer important clues about the outlook for rates to rise or fall.
An online mortgage calculator can help you estimate how your monthly payment and overall costs would change with different rates and terms.
5. Research mortgage lenders
Mortgage lenders aren't all alike. Some lenders are banks. Others are credit unions, mortgage brokers, or other types. Which type is the best fit for you depends mainly on your comfort level with the different business models of these financial firms.
Read more: What all the best mortgage lenders have in common
When you're ready to refinance, it's always a good idea to shop around and compare offers from multiple lenders. Getting to know several before you're ready may help you execute more quickly when the timing is right.
With these steps completed, you’re better prepared to refinance now or in the future.
If your timeframe is longer than a few weeks, mark your calendar to repeat these steps annually, semiannually, quarterly, or monthly. The closer you are to refinancing, the more frequently you'll want to update your information. Each time you do, you'll be positioning yourself anew to take advantage of current and future refinancing opportunities.
