Considering a mortgage refinance? This is where to start

With millions of Americans out of work, widespread lockdowns and delayed stimulus packages, it’s safe to say that the coronavirus pandemic has had a significant financial impact on many consumers. It hasn’t all been downhill, though. The demand for homes increased in more markets, which was matched by a sharp decline in new mortgage and refinance rates.

1. Contact your current mortgage lender

One of the best places to start when refinancing your mortgage is with your current lender. Explain why you want to refinance and see if they offer lower rates. If your mortgage is in good standing, they may be able to offer you some of the most competitive terms in order to keep you from refinancing your home loan with someone else. You might have already established a relationship that gives the lender a good idea of your loan eligibility. Plus, the application process may be smoother if not much has changed since you applied for your first home loan.

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2. Shop around for refinance rates

While you don’t have to go far to contact your current lender about refinancing, you should still shop around for mortgage rates with other lenders, as well. This can give you a good idea of what other lenders are offering, especially if you want to negotiate a lower rate. Borrowers who shop around can save an average of $1,435 on a $250,000 mortgage, according to mortgage loan company Freddie Mac.

Remember that shopping strictly for the lowest rate isn’t always the best strategy for your mortgage refinance since other fees and conditions may apply, as well. You may want to shorten your term, take cash out, or lower your monthly payment.

3. Check your credit score

Your credit score plays a big role in whether you’ll be eligible for mortgage refinancing. This is why it’s important to check your credit and review your report in full before you start the process. On average, you’ll need a 620 to 720 credit score to refinance, depending on your loan to value and debt to income ratios.

You may want to pay off some of your credit card debt to boost your credit score, and make sure you’re paying all your other bills on time. As with applying for a new mortgage, avoid opening a new credit card once you start the refinancing application process and close on your new home loan. This can help you avoid any snags while refinancing your mortgage.

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4. Plan for closing costs

Don’t overlook or underestimate closing costs when beginning the process of refinancing your home. You want to make sure you can afford to cover costs like origination fees, a new home appraisal, title and insurance fees and mortgage points.

Budget for these costs in advance or consider a no-closing-cost mortgage refinance, which is where you roll all your closing costs into the loan amount. The major downside of doing this is that you could be stuck with a bigger mortgage amount or a longer repayment term than you initially wanted.

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Remember, a mortgage refinance may not always make sense

Always start the mortgage refinance process by shopping around to compare rates, keeping in mind your unique financial situation. Determine why you want to refinance your mortgage in the first place, whether that's lowering your monthly payment, saving money on interest or paying off your home faster. You can estimate your monthly payment based on your home equity, the amount left on your current mortgage and estimated interest rate using a mortgage calculator. Then, decide whether refinancing your mortgage helps you meet your financial goals.

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