There are many potential benefits to refinancing your home. But there’s a good amount of strategy and preparation involved to getting the maximum benefits available. Here are some steps you can take to help you get the best deal possible on your refinance.
- Clearly define your goals and speak to a mortgage professional
- Review your finances, credit, budget, and monthly debts.
- Prepare for the approval process: credit check, document collection, and closing costs
- Get your house ready for an appraisal and address potential health or safety issues.
- Make necessary repairs, reduce clutter, spruce up landscaping, deep clean, and ask your neighbors for advice.
1. Clearly Define Your Goals
Understand your end goal for why you want to refinance. Are you looking to get a lower interest rate or reduce your monthly payments? Perhaps you want to take cash out of your home equity to invest in your business or consolidate debt. Or maybe you want to lengthen or even shorten your loan term. Knowing exactly why you’re looking to refinance is important for weighing the pros and cons of your different refinancing options.
There are several different benefits or goals you can achieve through refinancing. However, it’s important to clearly define what those goals are, and how refinancing can have a real, tangible, positive impact on your daily life and/or financial future.
After thinking about your “why” for refinancing, talk to a mortgage advisor about these goals to get more clarity on the next steps. A great mortgage advisor should be there for you to crunch the numbers, do some of the cost-benefit analysis when looking at your refinance options, and help you determine how you can get the best deal possible out of this transaction.
You should also think about potential changes in your future income. For example, if you’re looking to retire in a few years, then your income may decrease. In this case, you may not want to take on a financial burden that will be difficult to handle in the future.
2. Keep Your Finances In Check
The better your financial situation, the better options you may have available to you. As an example, the higher your credit score, the greater your chances of getting a lower interest rate. Make sure to avoid any missteps that might harm your credit such as taking on excessive credit card debt or accidentally missing a bill payment.
If you haven’t looked over your budget lately, now’s probably a good time to. Review your spending over the last 3-6 months to identify any spending habits you can improve or extra expenses you can eliminate.
Take note of your debt-to-income ratio, as this can impact your refinancing options. You may also want to keep your household finances as stable as possible. Any decrease in income or large purchases may complicate the refinancing process.
3. Prepare For The Approval Process
You still have to qualify for a refinance similar to how you got approved for your original mortgage. This means having your credit pulled, sending in documents to verify your income and finances, as well as paying closing costs on your refinance. (However, you may be able to opt for a “streamlined” refinance, which is a faster approval process.)
To get approved for a refinance, you’ll need to have your credit checked. If you haven’t taken a look at your credit report recently, it’s probably a good idea to go to AnnualCreditReport.com and make sure there are no errors in your credit history.
In addition to checking your credit, your mortgage advisor will need to collect documents from you to verify your income. These documents likely include two years of W2’s and your most recent pay stubs. Your mortgage advisor will let you know the exact documentation that they need from you. In the meantime, you may want to start gathering your proof of income documents ahead of time.
You should also plan ahead for the refinance closing costs, which may be around 2% to 5% of your loan amount. When discussing these closing costs with your mortgage advisor, you may have to weigh these closing costs compared to the benefits you can get from refinancing to determine if the overall benefit is worth it.
4. Get Ready For The Appraisal
In some cases, the home appraisal may be waived, but oftentimes lenders will require a new appraisal of your home in order to calculate your home’s current market value. This appraisal will help determine how much equity you have in your home. The more equity you have, the better, because this gives you more leverage and options for refinancing. For example, on a cash-out refinance, your home equity will affect whether you qualify, as well as how much money you can take out.
If a new appraisal is required, you’ll need to pay the appraisal fee as part of your refinance closing costs. Home appraisals can range between $300-$450 or more depending on your market and on the size of your property.
Let’s take a look at some quick tips for scoring the highest appraisal possible:
Maintain, maintain, maintain!
Property values tend to increase over time, so if you’ve been living in your home a few years (while maintaining it in good condition), there’s a good chance that it’s gone up in value. That’s why keeping your home in good condition may very well be the #1 priority when it comes to protecting your property’s value.
Regular maintenance and upkeep can prevent water damage, pests, safety hazards, and structural issues that could detract from your home’s value.
Most importantly, you should address any potential health or safety issues. For example, making sure smoke/carbon monoxide alarms are in order. If the appraiser notices any safety hazards, this can delay the appraisal process and cost you more in fees.
While appraisers are typically trained to look past clutter, it’s still a good idea to tidy up, especially if you have any clutter in the yard, entryway, or common areas.
Tidying up ahead of time may help you notice other updates you can quickly make, like cracks you can seal up, walkways to power wash, or signs of water damage you can fix before they become severe.
Improve your curb appeal
The exterior of your home is the first thing your appraiser will see, so it definitely doesn’t hurt to give them a great first impression.
In some cases, investing in major landscaping updates like retaining walls or paver patios can increase your home’s value. But you don’t have to take on big budget landscaping projects to add curb appeal. Simply mowing the grass, trimming plants, and power washing the walkways can make a huge difference.
Replacing door knobs and lighting fixtures, fixing broken tiles, or repainting your front door, these sorts of small (but mighty) improvements may positively impact the appraiser’s valuation.
Ask your neighbors!
It’s one thing to do your research online, but doing some hands-on research in your local area just might give you an upper hand.
You may have neighbors in your area who have maintained and updated their homes over the years. Many of them may have gone through the appraisal process themselves. Getting feedback from your neighbors could give you some insights into what the appraisers in your local area are specifically looking for.