Mortgage interest rates are an inconvenient expense that can fluctuate due to a variety of factors. So, when those numbers go down, you want to take advantage of that situation. Refinancing is one of the most effective ways to lower the interest rate on your mortgage. As such, knowing some important information, such as how your credit score and income factor into a refinanced mortgage, can help make the process go more smoothly for you:
1. Know your debt-to-income ratio
One of the factors that most influences your credit score is your debt-to-income ratio. As such, if you want to improve your credit score before refinancing, set your sights on reducing the amount of debt you have relative to your income.
2. Prep your home for appraisal success
In order to qualify for a refinance, you are going to need to get an appraisal done on your house. If the house appraises for less than you purchased it for, you might have difficulty getting approved for a lower interest rate, especially if you are looking for a cash-out situation. Thus, prior to the appraisal, note areas of your home that are in need of significant improvement. For example, holes in the wall, broken windows, destroyed floors or serious issues with the home’s electrical system could negatively impact the appraisal value.
3. Know your credit score
Your credit score usually plays a significant role in determining your new interest rate, which means you will want to be aware of where your score stands. A higher credit score is likely to lead to a lower interest rate. Therefore, knowing your score will help you to determine if now is the right time to refinance. You may decide to work on your credit score and refinance at a later time when your score is improved.
4. Know your home’s equity
You will also want to know how much equity has been built up in your home since you purchased the house. Equity is the appraisal value minus the amount of money that you bought the home for. If you have equity in your house, you could do a refinance with a cash-out option. In other words, you can take out the money that your home has accumulated in equity. Some lenders will have a cap on how much of that money you can take out. You can use that money to make further repairs to the house, or you can put toward other expenses. You can also roll this sum into your mortgage to pay the funds back.
5. Get quotes from multiple lenders
You might think of an interest rate as a factor that is the same from lender to lender. However, this assumption could lead to losing out on a great deal. Do not settle on the first offer that you get when it comes to refinancing for a lower interest rate. Make sure that you shop around and compare quotes. By taking the time to do so, you can get the interest rate that saves you the most money each month.
