Refinancing Your House? Follow This Guide

There are a wide variety of reasons to refinance a home, but these days a big motivator is to get a lower payment along with a better interest rate. This makes your month-to-month cash flow better while still paying less interest on the principal of your loan. Other refinancing choices, like a cash-out refinance, can allow you to tap your home’s equity for major renovation or improvement expenses that, ideally, also improve the value of the home over time. Others are wanting to get PMI removed from their loan due to the rising property values in their area making their equity in their homes grow. 

Regardless of your particular motivation for refinancing, here are some key tips for making sure you get through the refinance process. The key is to do research first so that you know what to expect and then be very clear on what goals you want to accomplish with this project since it does usually come with some costs and you want to weigh benefits and drawbacks along the way.

Prepare Your Documentation

You’ll need all the access and documents that helped you apply for your first home mortgage in order to apply for your refinancing loan since it is effectively a way to pay off your first mortgage and begin a second one. At this point, you’ll need to look at any fees that could be triggered by refinancing, as well as any new debt or changes in a credit history that could change how a lender sees you as a borrower. This isn’t something to fear, just something to gather and evaluate. If it works out, you could see quality-of-life improvements like cashing out some equity, lower payments, or a lower interest rate. 

Understand the Refinance Appraisal for Current Market Value

A key ratio to understand as you move forward in the refinancing process is the term “loan to value ratio,” or LTV. Basically, if you have only been paying on your mortgage for a few years or less, you may not yet have reached a LTV where a lender will be interested in refinancing your loan. This, however, can change if your home has grown in value quite a lot. 

For example, imagine you bought your home with a mortgage for $200,000 when it was worth $210,000, and you’ve now paid down $20,000, bringing your principal to $180,000. Your LTV would be 86% (180,000/210,000) if values held constant, but remember, it’s 2021! Let’s say your area got very popular and homes like yours are selling for $240,000 now. This could reasonably bring your LTV to 75%, potentially qualifying for a refinance at a new lower rate. 

Of course, the lender isn’t going to take your word for it that homes in your area sell for $240,000 now. Instead, they’ll have an appraiser evaluate your home to find its current market value. This professional appraiser is motivated to be honest and objective, just using the facts and the comparable home data to offer an estimate of what the home would sell for if sold today. 

It can understandably be nerve-wracking to have the outcome of your refinancing loan in the hands of someone evaluating your home’s value. At the same time, they make their reputation by accurate estimations, so if the home doesn’t appraise for as much as you expected, they are more than likely correct. It isn’t a great piece of news, but it is also good to have accurate, not overly-hopeful information when making financial choices.

Be Wise About Cashing Out Equity

Let’s say your equity has risen, you qualify for your refinance, and the appraisal has confirmed it. At this point, should you roll that equity over into the next loan, paying a lower payment or for fewer years, or should you cash it out? 

In many cases, the less risky move is to keep that cash in your home. For one thing, you can often borrow against home equity with a home equity loan if it is needed that badly. Pulling equity from your home is essentially like “going backward” on your mortgage payments, even if the appreciation of your home feels like it was just a source of free money. If prices were to ever fall, you’d be left with a large mortgage and less possibility of hitting that high current market value when you sell. 

One of the main reasons why a home equity cash-out refinance can be recommended is if you specifically use it to improve the house. The reasoning is that this money has at least a partial return in terms of higher property value. While not every home improvement is going to improve the overall value of your home, this is one time when the allure of taking out a lump sum of equity may be worthwhile. 

Let the Process Run Its Course!

One big piece of advice, no matter what kind of refinance appraisal you end up having, is to not rush the process. While appraisers should know if any of the improvements they are seeing have happened since the home was purchased, you should otherwise let them do their work and come to you if they have questions.

Being prompt with replies, thorough with responses, and clear about your goals will help you get through the refinancing process. Even if this isn’t the season for all your goals to be met with a refinance, you can evaluate the offered rates and terms you receive on their own merit. Even just a change to a lower interest rate can often be helpful enough to have made the refinance process worthwhile.

Want to know more about housing trends and how to move forward with a real estate transaction? The Homelight Agent Insights Report has lots of up-to-date information about how the market is moving. It’s nice to know how the market is moving when you make choices about your own home’s sale, purchase, or refinance.

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