A home mortgage refinance is an expensive endeavor. According to the Federal Reserve, the average home refinance in the United States costs the borrower between 3 and 6 percent of the loan amount in closing costs. The closing costs can quickly add up to thousands of dollars, depending on the value of the loan amount. This makes a home refinance a serious financial decision.
In order to qualify for a home mortgage refinance, a borrower must meet certain preset requirements. These requirements vary based on the mortgage type chosen, but some basic qualifications are similar across the board. The minimum credit score for most traditional mortgage products is 620, but some go as low as 580. The higher the credit score, the lower the interest rate. It is in the borrower’s best interest to work toward the highest possible credit score prior to making a home mortgage application. A borrower should check his credit report for errors and work to remove any prior to applying for a mortgage. Another quick way to improve a credit score is to pay down all revolving lines of credit, such as credit cards, down to less than 30 percent of their limit. This quickly lowers credit utilization and raises a credit score.
Many borrowers wonder when is the right to refinance, especially considering the hefty costs involved in the process. Typically, lenders suggest that a borrower begin to consider refinancing when the interest rate on the mortgage would be lowered by a minimum of 1 percent. Another important bit of information is the break even point. The break event point occurs when the per month savings in the refinance “pay off” the expense of the closing costs. To find this point, divide the closing costs by the per month savings. This number should be less than 24 months, or two years. Additionally, the borrower should consider how long he plans on staying in the home. If it is less than the amount of time it takes to break even, or is not much longer, it is probably not wise to refinance the debt.
It is in the borrower’s best interest to work towards reducing the closing costs. In most cases, borrowers include the closing costs in the mortgage refinance. While this means that the borrower does not have to pay any money out of pocket, it does eat away at the built up equity in his home. Therefore, reducing the closing costs lessens the effect on the debt as a whole. Certain costs are non-negotiable in the process, such as taxes and state mandated fees. However, other costs are quite negotiable. Consider getting three quotes on a mortgage loan and compare the total closing costs on each one. Find the loan with the lowest costs and ask your preferred lender to match or beat the quote. Additionally, ask the lender to consider reducing the origination fee. This fee is the fee charged to the borrower for the work of the mortgage loan officer. It is typically the most negotiable fee in the deal, as well as one of the largest. Many lenders charge a full 1 percent of the loan amount for the origination fee, however, asking for a fee reduction of 1/2 percent is normal for most mortgage markets. Additionally, ask your lender if other fees are negotiable and if certain services, such as title and closing services, can be completed by cheaper firms. Any small reduction in fees will help the bottom line of the deal.
Federal Reserve: A Consumer’s Guide to Mortgage Refinancing
Federal Reserve: Looking for the Best Mortgage