You know you want to refinance, but you are waiting for the right time. Rates have been exceptionally low for the past few years, so you know they are bound to rise. Experts believe rates will remain fairly steady throughout 2017, but eventually they have to go up. So how do you prepare for a home loan refinance before rates rise? Here are a few simple tips you can use.
Refinance as Soon as You are Ready
When you think the time is right to refinance – do it. Don’t delay. Delaying only causes you to miss the boat on the rates you thought you wanted. There is no way to predict if rates will rise or not in the coming months, but why wait? Even if they dropped slightly, the savings would not be that significant. If they rise, though, you may miss the boat on your savings. Most people have a “break-even” point to determine when refinancing makes sense. You figure it out as follows:
- Total your closing costs including any points or fees you pay the lender
- Subtract your new mortgage payment from your existing payment to see the monthly savings
- Divide the total closing costs by the monthly savings to see how long it will take you to see the real savings of your refinance
If you wait too long to refinance and rates increase, it pushes your break-even point out even further. If this is not your “forever” home, you might miss the opportunity to refinance because you will not save any money. Remember that closing costs can cost between 2 and 5% of your loan amount, so they are a significant cost that you must think about.
Work on Your Credit
Your credit score is always a work in progress. It changes monthly, depending on your activity, so you could always be working on it. Think about the following scenarios:
- Is your outstanding credit close to the available limit? Even more than 25% of the limit is too much.
- Do you have any recent late payments?
- Do you have any collections?
- Are most of your accounts fairly new?
Each of these issues can decrease your credit score. The lower your score, the harder it is to refinance. Even if you can refinance, you will not secure the lowest rate available. If rates rise, you are in even deeper water than before. This is why your credit is always a work in progress. Stay informed of your score and what your credit history looks like. Make any changes you can make, such as paying your high balances down or making your payments on time. Positive changes usually only take 3 months to take effect on your credit score, so they are well worth the effort so you are ready to refinance when the time is right.
Gain More Equity
The more you have invested in your home, the less risk you pose to a lender. This usually means lower interest rates, even if rates rose. You can gain equity in two ways:
- The value of your home increases due to the values of surrounding homes
- You pay your principal balance down by making extra principal payments
Either way, your loan-to-value ratio benefits from the changes. The lower your LTV, the lower your interest rate. If you want to prepare for a home loan refinance, make an effort to pay your principal balance down. You can do this in several ways:
- Make extra payments towards principal whenever you have the extra money
- Create a consistent schedule of extra payments, such as $100 every month
- Divide a full mortgage payment by 12 and pay that extra amount each month
- Make one extra mortgage payment each year with your bonuses or tax refund
No matter how you do it, the end result is the same – you own more of your home. This decreases your LTV and increases your chance of a lower interest rate.
Stabilize Your Employment for a Home Loan Refinance
Old school mortgage rules required you to stay at the same job for 2 years before you could apply for a mortgage. This is not the case today. Lenders know that people change jobs much more frequently. What they watch for is a pattern in your employment and income history. For example, if you hop from job to job several times a year and do not always make the same amount of money, you are high risk. On the other hand, if you only have one or two job changes and each one shows an increase in income, you do not pose as high of a risk.
If you do change jobs, try to have an explanation for your lender. For example, if you underwent training to take on a higher paying job, show the lender the proof of this. Or maybe you changed jobs because you went to school for a different career. Whatever proof you have to show the lender that the change was not haphazard and that you have a plan in mind will help your case. Of course, if you stay at the same job for 2 years, though, this gives lenders the smallest risk.
Take Out a Home Equity Loan
If you want to tap into the equity of your home, but want to leave your first mortgage alone, consider a home equity loan. This is different from a home equity line of credit. The HELOC has a variable interest rate. Every time the Prime rate changes, so does your interest rate on the HELOC. A home equity loan, however, has a fixed rate, much like your first mortgage. This lets you lock in the rate you want and keep it for the term of the loan. This prevents any unpleasant surprises down the road.
You should always be prepared for a home loan refinance. You never know when you will need to at the drop of a hat. Maybe you hear rates will rise in the near future and you want to refinance quickly or maybe you need money suddenly. Whatever the case may be, you should always be ready by watching your credit, income, employment, and the LTV of your loan. The less risk you pose to a lender, the more likely you are to refinance in a pinch.
