You’ve carefully weighed the pros and cons and have decided that refinancing your mortgage is the way to go. You’ll save money in the short term and potentially in the long term, as well. However, you’re not sure where to start or how to refinance your mortgage.
If the property you’re looking to refinance is located in Pennsylvania, PSECU might have the loan that fits your needs. Check out our home loan options to see if one works for you. In the meantime, here’s what you need to know — and do — to get the refinancing ball rolling.
Improve Your Credit Score
For some homeowners, the first step to take when trying to refinance a mortgage is to focus on improving their credit scores. A lender wants some assurances that they’re making a wise decision in lending you money. One way to gauge how likely you are to repay on time is to look at your credit score. That’s because a credit score is based on factors that include that very thing – paying debt obligations on time. The higher your score, the more likely it is that the lender will want to lend to you.
One of the main reasons people refinance a loan is to lower the interest rate on their mortgage. A lower interest rate means you pay less in interest each month and over the life of the loan. How the interest that you’ll pay is determined depends on where you look for your loan. For financial institutions that do what’s called “risk-based lending,” they base rates on credit scores. At PSECU, we don’t do risk-based lending. Members whose credit scores qualify them for a loan will all pay the same rate.
Whether your credit’s never been great, or you’ve always had good credit, it’s still important to check your credit before you apply for refinancing. You’ll want to make sure your credit reports are accurate and understand how your actions can impact your credit report, and ultimately your credit score. Lenders may use a combination of these to determine if they’ll approve you for a new loan.
Before you can set about improving your score, it’s important to understand what goes into a credit score. As mentioned earlier, payment history is a key factor. Other components noted in your credit score include:
- Amount owed
- Length of credit history
- Credit mix
- New credit
You can keep track of your score for free with PSECU. Monitoring your score can help you see where there’s room for improvement. If your score isn’t where you’d like it to be and you want to try to raise it to get the best possible interest rate when you refinance, here are few things you can do:
|Pay off any balances. If you carry a balance on a credit card, paying it off will reduce the amount you owe and may give your score a lift.Keep card usage to a minimum. Don’t charge up to the limit — or anywhere near it — on your cards each month.|
|Pay your bills on time. Whether you make on-time payments or not has the most significant effect on your score. Set a calendar reminder or use Bill Payer so that you never miss a due date.|
|Avoid opening new lines of credit. Opening a new credit card or another type of loan can cause your score to drop a bit. Hold off on getting that new card until after you’ve finished the refinancing process.|
|Check your credit report. Credit reporting agencies do make mistakes. Review your credit report to make sure the information on it is accurate and up to date.|
|Keep card usage to a minimum. Don’t charge up to the limit — or anywhere near it — on your cards each month.|
|Don’t make big changes. Closing or opening new accounts can affect your credit score by impacting the average age of your accounts and other factors.|
If you’re looking to refinance, avoid making any significant changes to your accounts until after the loan is closed. Additionally, if you anticipate making a large purchase or changing jobs during this time, you may want to check with your lender to determine the potential impact on your loan.
Know Your Home’s Value and Your Equity
After you’ve put some effort into increasing your credit score, it’s time to focus on how much your home is worth and how much equity you’ve built. Generally speaking, you need to have equity in your home to refinance your mortgage. Equity is what remains after you subtract the amount of your mortgage principal from the value of your home. Typically, having at least 20% equity in your home can lead to the best rates. It also means you won’t have to pay private mortgage insurance.
Keep in mind that if your home is worth less than you want to borrow, you might not be able to refinance at all. If your home’s value has dropped since you purchased the property, you may need to wait for its value to recover before you can refinance. Check with your potential lenders about any restrictions they may have in place regarding home value and refinancing.
Understand Your Refinance Options
When you refinance a mortgage, you might get a bit of a déjà vu feeling. That’s because refinancing is very similar to taking out a mortgage in the first place. Take a look at a few of the features you’ll need to choose between when refinancing your home loan and the different types of home loans available:
- Loan term. Just as you chose between a 15-year, 30-year, or other term for your first mortgage, you’ll also need to pick the loan term that makes the most sense for when you refinance. If you choose a 30-year loan, you’ll most likely make smaller payments each month than on a 15-year mortgage, but for a longer period of time, meaning you’ll ultimately pay more. If you choose a 15-year term, you’ll spend more each month on payments, but you’ll pay off the loan sooner and pay significantly less in interest.
- Interest rate. You don’t have much say over how much your interest rate is, but you can usually choose between a fixed interest rate and an adjustable rate. With a fixed interest rate, the rate remains the same over the life of the loan. With an adjustable rate mortgage, the interest rate is locked in for a period, but it can go up or down based on the market after that time.
- Amount of the home loan. In some cases, people decide to refinance just to pay off their first mortgage with a loan with a better rate. In this case, the balance of your current mortgage is paid off with the new home loan, and you may have the option to roll the closing costs for your refinanced loan into the loan principal. In other cases, people use their refinanced loan to pay off their first mortgage and closing costs, as well as take out cash for another purpose.
Consider a Credit Union for Refinancing
When you decide to refinance your current mortgage, you aren’t locked into going through your current lender. You have the option of switching to a different financial institution. You may find that changing lenders works in your favor.
That’s particularly the case if you decide to switch from working with a bank to working with a credit union when it’s time to refinance. Compared to a bank, a credit union might be the better bet. Credit unions are not-for-profit, member-owned financial institutions that offer many of the same services as most banks, but for a lower cost.
The benefits of working with a credit union include:
- You’re a member and owner. When you join a credit union, you become a part of something. You’re part of a movement based on the “people helping people” philosophy. You get part ownership of something — the credit union itself. You also benefit — in the form of better rates and lower fees — when the credit union performs well. As a member, you can take advantage of exclusive perks, such as being eligible for scholarship programs and receiving discounts from other companies.
- Interest rates are often competitive. One of the financial perks of working with a credit union when you refinance is that you’re likely to get an interest rate that’s lower than the one you would get with a bank.
- Fees are often lower. Another perk is that, in general, you’re likely to encounter lower fees at a credit union compared to what you would find at a bank.
Know the Costs of Refinancing Your Mortgage
Now for what might be the most pressing issue — how much will it cost to refinance your mortgage? You’ll come across multiple fees and expenses when you refinance, many of which might be familiar from when you got your first mortgage. Learning more about these fees can help you budget and decide whether refinancing is something you can afford to do.
Common Fees Associated With Refinancing
When you consider a lender for refinancing, keep your eye out for fees, such as those listed below. In keeping with our low- or no-fee philosophy, note that some of the fees below are not charged by PSECU at all. Just give us a call if you have any questions.
- Mortgage application fee. Even if you don’t end up going through with the refinance, some lenders will charge a fee to process your application.
- Appraisal fee. You’ll most likely need to have your home appraised to confirm its market value before you can refinance. Appraising the home will help you avoid borrowing more than it’s worth.
- Loan origination fee. When you first get the home loan, a lender is likely to charge an origination fee, usually a small percentage of the value of the mortgage.
- Home inspection cost. Not every lender requires a home inspection as part of a refinance, but yours might. A home inspection isn’t the same as an appraisal. An inspection is done to detect any potential issues with the home.
- Document preparation fee. Your lender might charge you to prepare the documents required to refinance a home.
- Title search fee. Your lender will want to verify that you are the real owner of the home and may charge you a fee to run a title search to confirm.
- Title insurance. Title insurance protects you just in case the title search brings up any issues.
- Recording fee. The recording fee covers the cost of putting your refinanced mortgage on the public record and may vary based on where you live.
- Attorney fees. If you work with an attorney during the refinancing process, you’ll need to pay their fees.
- Survey fees. Your home might need to be surveyed to make sure there are no issues or disputes over its boundaries. You may be charged a fee for this service.
- Credit report charge. Often part of the mortgage application, a lender may charge you a fee to run a credit check so they can get a full picture of your finances before approving you for the loan.
An essential component of refinancing a home loan is having the paperwork and documentation that shows a lender you’re a viable candidate for a new loan. You’re likely to need a variety of different documents to prove your income, credit, and identity.
While it’s a good idea to check with your lender and get a specific list of what paperwork is needed before you apply to refinance, here’s an overview of what is required:
- Identification. You’ll need to prove you are who you claim to be. Have a driver’s license or passport ready to go.
- Proof of income. A lender wants to confirm that you earn enough to cover the cost of your mortgage each month. How you prove your income depends on the type of work you do. If you’re an employee, you’ll need copies of your most recent pay stubs, plus your W-2s. If you’re self-employed, you’ll want to present your most recent tax returns.
- Financial account statements. How much you have in the way of assets, such as savings accounts, retirement accounts, and investment accounts can also help a lender assess your refinance application and determine whether you’re a suitable applicant or not.
- Credit history/report. Your lender will run a credit check as part of your application. However, you may want to look it over before you apply to refinance your mortgage so that you’re aware of any glaring issues you need to fix beforehand. The government allows you to get a free credit report once a year from each of the three major credit reporting bureaus (be sure to use annualcreditreport.com, the only website required by the federal government to provide these for free).
What Else You Need to Know When Refinancing
At this point, you might be ready to jump in and feel confident about the process of refinancing your mortgage. But you might also have a few more questions about the process and whether you qualify or not. Read on for answers to common questions about refinancing a home loan:
- Can I refinance a home loan with a credit union if a bank owns the original mortgage?
- Yes, you don’t have to continue to work with your original lender when it’s time to refinance.
- Can I avoid paying fees and closing costs?
- When it comes to fees, some are unavoidable, like a recording fee that’s determined by the county you live in. Other fees may be negotiable and depend on your lender, so you’ll want to research what fees your potential lenders charge and the amount of each. As far as closing costs, you’ll likely have to pay them. However, some institutions allow you to roll them into your loan, so you can pay them over time, rather than up front.
- Can I get an estimate of fees before I refinance?
- Yes, your lender should give you an estimate of fees before you finalize your new loan. You should also feel comfortable asking your potential lender for an overview of fees before you begin the process.
- Is a fixed-rate mortgage always better than an adjustable-rate mortgage?
- It all depends. You might get a better interest rate up front with an adjustable-rate loan, but there’s the chance that the rate will increase after a few years. On the other hand, you may get a fixed-rate loan that seemed great at the time, but if interest rates drop after a few years, you’ll still have the higher rate, unless you refinance.
- Is there a way to avoid so much paperwork when refinancing?
- Unfortunately, paperwork is a part of the process. The best thing you can do to stay organized is designate a secure location to store all of your documents so they’re easy to keep track of. Making sure that you respond to your lender’s requests for additional information quickly may also streamline communications, eliminating the need for them to send multiple requests or reminders.
- What happens if my application is turned down?
- If you want to refinance, but your application is denied, you have a few options. You can work on improving the issue that led to your application being declined. For example, you can work to raise your credit score, if that was the reason your application was denied. In some cases, you might need to take a wait-and-see approach, such as if your home’s value is too low to qualify for a refinance or if you need to build up more equity in the home to qualify. You might also benefit from exploring a different refinancing option, such as an FHA loan or another program.
- Can I refinance a home equity loan?
- Yes, you’re not limited only to refinancing a primary mortgage. If you have a home equity loan or line of credit, you might be able to refinance your loan to take advantage of a better interest rate.
If you’re ready to start the refinancing process, PSECU can help. We offer a variety of mortgages for current homeowners and are happy to assist you in choosing the loan that’s best for you. To learn more about how to refinance a home and our home loan options, contact us today.