Refinancing is different from buying a home. Here is a guide to help you understand exactly how they’re different and what they have in common.
Refinancing Goals
The lender will suggest a refinancing loan that helps you with your financing goals. It’s a good idea to let the lender know ahead of time what you want. For example, you may want: cash from equity, convert an ARM to a fixed rate, or reduce a loan payment.
Required Home Appraisal
You may be able to pay less for the required home appraisal with quick drive-by appraisal. However, since this only sees the curb view, give the appraiser a list of improvements you’ve made, with the day you completed them and how much you spent. A regular appraisal cost may cost you $300 to $500.
Determine Loan-To-Value Ratio
Appraisals are critical because LTV (loan-to-value) ratios help determine how much you can refinance. The lender uses a simple method to figure out the LTV:
A $120,000 loan debt is 80% of a $150,000 appraised value. Lenders typically accept up to 80%.
LTV Ratio Options
For cash from home equity, you’ll usually have a 75 – 80% LTV restriction. If you want to change an ARM to a fixed-rate mortgage or reduce your rate, lenders might accept a 90% LTV, if you pay for private mortgage insurance as well.
Credit Score
Your credit is determined by taking the scores from the 3 leading credit agencies and dividing the total by 3 to get an average. A high average score may compensate for a 90% to 95% debt owed on your mortgage.
Loan Program
While your lender checks the rates and selects a loan program, discuss getting a better rate. Be aware that advertised rates might be different than yours.
Debt-To-Income
Your monthly pretax income will be compared to your monthly debt. Lenders will review: credit cards, car or student loans, alimony and child support, plus the refinanced loan payment to calculate your debt-to-income ratio. A maximum 36% ratio is preferred.
Insurance Binder
The lender will ask your homeowner’s insurance representative to designate the loan company as the beneficiary through a temporary insurance binder.
Closing Costs
Prepayment for homeowner’s insurance and property taxes might not be required. This will reduce your closing costs. Often, the closing costs can be added to the loan, but it will add to your interest costs.
