How to get approved for a mortgage refinance (and save money) today
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Freelance writer
Christy Bieber has spent more than 16 years in personal finance and is an expert on student loans, debt, social security, and mortgages. Her work has been published by The Motley Fool, CBS News, and MSN.
Updated October 16, 2024, 2:48 AM EDT
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The coronavirus pandemic has resulted in mortgage refinance rates hitting record lows, presenting homeowners with a chance to potentially save thousands of dollars in interest on mortgage loans. But to take advantage of the lower interest rate and lower your monthly payments, you'll need to know how to get approved for a mortgage refinance quickly.
If you want to maximize your chances of refinancing your existing mortgage and boost your savings account, then you may want to follow some of these helpful tips. Here are three of them.
1. Comparison shopping for a lower rate
Different refinance lenders establish their own requirements to qualify for a refinance loan. Some allow borrowers to refinance with less equity than others or offer loans to borrowers with lower credit scores or less monthly income. For homeowners who are concerned about being able to qualify for a mortgage refinance loan, it often pays to shop around to find refinance lenders that may have more relaxed standards for approval.
EVERYTHING YOU NEED TO KNOW ABOUT REFINANCING
What are today's mortgage rates?
For those interested in getting approved for a refinance and improving your personal finance, there's some good news.
Today's mortgage rates are at record lows. This can lower your monthly payments, which not only results in a mortgage that costs less to repay but can also make it easier to get approved to borrow. With Credible, you can choose a desired loan option and prequalify in just minutes.
PERSONAL LOAN OR HOME EQUITY LOAN: WHICH IS BETTER?
According to Freddie Mac, mortgage rates as of August 20 were 2.99% for a 30-year fixed-rate mortgage loan. For a 15-year fixed-rate loan, rates averaged 2.54%.
These are substantially lower than rates at the same time last year when borrowers were looking at an average rate of 3.60% for a 30-year fixed-rate loan and 3.05% for a fifteen-year fixed-rate mortgage.
IS IT WORTH IT TO REFINANCE FOR 1 PERCENT?
2. Repaying debt and improving your credit
Paying off existing debt (credit card debt or otherwise) can help homeowners with bad credit improve their chances of being approved for mortgage refinancing in two key ways.
- It raises your credit score
- It lowers your debt-to-income ratio
Raising your credit score: Reducing debt balances can raise credit scores by reducing the credit utilization ratio. This ratio refers to the percent of available credit a borrower has used and it should be below 30% to maintain the best possible credit score. Since a lower ratio can boost credit, repaying debt can lead to the higher scores lenders look for when determining approval for a refinance. Remember, it's always important to build credit.
Lowering your debt-to-income ratio: Reducing debt can also be helpful as refinance lenders consider a borrower's debt-to-income ratio when determining loan eligibility. Having too much debt relative to income makes a would-be borrower appear high risk to a lender, potentially affecting loan approval. When that debt is paid down, mortgage loan providers are more likely to approve a refinance at a favorable rate. The application process is simple.
3. Putting more cash on the table
Lenders require equity in a home in order to approve a refinance. Borrowers can't owe more than the home is worth. And, in many cases, lenders require the total balance of the new loan to be below approximately 80% of the home's current value in order for a loan to be approved or for borrowers to avoid private mortgage insurance (PMI). Other lenders will allow a mortgage refinance for an amount as high as 90% to 95% of the market value of the home, but it can be harder to get approved for loans with such limited equity.
Borrowers who do not have equity may need to pay down some of their current loans before getting approved for a refinance one. This can be done in advance by making an extra interest payment on a mortgage. Or borrowers can bring cash to closing. For example, a borrower who owes $240,000 on a home valued at $245,000 might be approved for a refinance loan of only $220,000. The existing loan would need to be paid off as part of the refinancing process, so that borrower might need to bring as much as $20,000 to the table.
THESE ARE THE BEST (AND WORST) REASONS TO REFINANCE YOUR MORTGAGE
Is refinancing the right choice?
Borrowers with doubts about whether they can qualify for a new refinance loan may want to work on improving their financial situation or repaying debt before applying with a mortgage lender. However, those who have good credit and sufficient equity may wish to consider refinancing as soon as possible to take advantage of low rates.
Online refinance calculators can also help you determine whether the cost of refinancing is worth it and just how much you'll save over time by refinancing your current mortgage. If you still need more guidance when it comes to refinancing your mortgage, consider turning to a financial advisor.
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