While getting a lower interest rate is certainly the most common motivator for homeowners to refinance, the lowest interest rate may not always be the best choice for everyone. In some cases, loans with higher rates but fewer (or no) costs can end up benefiting you more than one with a lower interest rate. Besides the interest rate, there are plenty of other reasons to refinance your home.

Top 5 Reasons to Refinance

Prepare Yourself for Rate Drops

To get the best rate, you should analyze rates regularly and watch for drops. Falling refinancing rates are often publicly talked about in the news, which often leads to a major uptick in applicants. Waiting for refinancing to become a hot topic can mean risking higher numbers of applicants, meaning your refinancing application will take longer and cost more. s Fortunately, you can prepare for rate drops and stay ahead of other applicants.

Firstly, learn more about your target rate. Determine what interest rate would be ideal for you, then compare that to current refinance rates. If you run the numbers through a refinance calculator and find that the savings will cover loan costs quickly, then you have found your target rate. If not, run the numbers using a lower interest rate. Running the numbers until you find that the savings will cover the costs can help you better identify when you should pull the trigger and refinance.

Second, pre-approval for refinancing can help you quickly refinance when the time is right. Without pre-approval, you may risk small errors or unexpected problems delaying the process.

How Homeowners Miss the Refinancing Boom

Refinancing booms occur during significant mortgage rate drops. In these instances, rates drop to the point that a large number of homeowners may meet their target rate and take the plunge to refinance. There have been several of these refinance booms since the early 1990s.

In 2012, a Federal Reserve study showed that many homeowners did not capitalize on these refinance booms. The reason for this was simple: homeowners forgot or neglected to watch interest rate trends and missed the point at which they would have met their target rate. Other homeowners reported feeling that the refinance savings were too good to be true and did not believe they could qualify for such a loan. Other homeowners seemed daunted by the task of completing the necessary paperwork. This decision turned out to be quite a costly one. According to the Federal Reserve, those homeowners in 2013 that neglected to take advantage of refinancing offers could have saved $26,400 over the lifetime of their loans.

Though the last finance boom may have come and gone, you may still be able to save. Rates rise and drop regularly, and the resulting mini-booms can help you save money if you are prepared for them.

For homeowners who did not refinance in 2015, now would be the time to look at a few mortgage quotes, and prepare your paperwork: Credit score, home value, and current loan balance. Spending a few minutes with a refinance calculator can help you see how much you might save, which can help you to hold your own in a future conversation with a lender. Once you have your information in order, you can contact some lenders and begin applications refinancing. Since most lenders utilize automated underwriting systems to fill out and complete refinance applications, pre-approval can take mere minutes.

Your lender will give you the information you need and help you identify which documents are required to complete your loan. Most common requirements include two years of W-2s, recent paychecks or pay stubs, tax returns, and copies of bank, retirement, and investment statements. If you are approved, you will be able to lock in your loan the moment rates drop into your target zone. With a couple of hours of work compiling paperwork, you can save thousands of dollars a year. How often does the opportunity to earn thousands of dollars in a few hours come around?

Refinancing: The Basic Requirements

Many homeowners do not even consider refinancing their mortgages because they don’t believe they will qualify. Despite these worries, around 40% of homeowners who have not refinanced could have qualified to do so, and around half of those could have saved significantly on their refinanced mortgage. While it may sound outlandish, millions of people are overpaying for their mortgages month after month, year after year, despite qualifying for significant savings.

The fear for many homeowners is that they will put in the effort to apply only to be turned down. Though this fear is understandable, many homeowners will find that they meet more qualifications than they realized if they only do a little research. If you are feeling hesitant about applying for refinancing, take a look at this list of qualifications and see how many you meet.

Refinancing: When It Hurts You

Though refinancing your existing mortgage can help lower your monthly payments and interest rate, refinancing may also cost you more in the long run. Refinancing a five-year-old 30-year mortgage with a new 30-year mortgage means you are now paying a 35-year mortgage. Even with lower interest rates or monthly payments, this can mean paying off an extra 5 years of interest that otherwise could have been avoided. Now imagine you refinance again in 5 years, your 30-year mortgage has just become a 40-year one.

Extension on the Life of the Loan

While refinancing can save you money, many misinformed loan officers and lackluster refinance calculators often neglect to note the fact that refinancing restarts the homeowner’s loan payment clock, which often results in overestimating the benefits of refinancing.  

Let’s say for example you have a $300,000 mortgage with a 4.25% interest rate, making its balance after 5 years $272,423. Refinancing this loan with a new 30-year loan with the same rate of 4.25% will lower your payment by $136. Though some lenders and calculators may refer to this difference as ‘savings’ the truth is that there are no savings at all. Even without upfront costs or refinance costs, this refinance would increase the loan by $39,711 and add 5 years to the repayment period.

Now let us take a look at what happens when you refinance a 5-year-old loan to a lower rate without taking the extended repayment into consideration.

Though refinancing into a new 30-year mortgage will significantly lower your interest rate and payments, by the time the new loan has reached the end of the payment period you will have paid $11,442 more than if you did not refinance initially. Making higher payments and retiring the loan five years earlier with a 25-year mortgage will turn that $11,442 into $22,562 in savings, while also reducing your monthly payments to $75 a month. Though you did not extend the repayment term, this is where you find true savings.

Refinancing: The No-Brainer

If you can reduce your interest rate at no cost, or you will be able to recoup the refinancing fees prior to selling your home, then the decision to refinance is a no-brainer. However, these savings are guaranteed only if you do not extend your repayment period. Refinancing with a shorter term or paying a small amount extra every month, you can benefit from a lower interest rate without extending your repayment period. If this is the route you choose, your loan officer will help you calculate how much to pay, or you may be able to work it out with a mortgage prepayment.

Refinancing: I Don’t Think I Qualify

Everyone wants to save money, especially when it comes to high monthly mortgages. Mortgages interest rates are low, and you may be considering refinancing your mortgage to cut your bills, or maybe you are thinking about refinancing because you’re afraid of the unpredictable interest rates. Mortgage refinancing allows you to tinker with the mortgage repayment period. This means you can choose to lengthen your loan or shorten it to repay it faster.

Although refinancing your mortgage may seem attractive, it won’t make any sense if the numbers don’t add up. Always ensure that the current interest rate is anywhere near a half percent lower than your current mortgage interest rate. For instance, in case you have $390,000 remaining on a $400,000 loan at an interest rate of $4.25 percent, replacing your mortgage at a rate of 3.75 percent means you can save up to $162 per month.

Regardless of why you want to refinance your mortgage, in the back of your mind, you may be holding back from applying because you are uncertain whether you qualify for a refinance or not. One of the common misconceptions amongst most homeowners is that credit score is always king, and that is the main determining factor for a mortgage refinance approval.

While credit score matters, it’s not the only factor that lenders will consider. If you have a poor credit score, don’t assume that you are out of options. Having a less-than-perfect credit score may bar you from enjoying low-interest rates, but you can qualify for a mortgage refinance even if you have previously filed for bankruptcy. Below are a few examples of homeowners who thought they couldn’t get their mortgage refinance application approved, but they were able to overcome all barriers.

Refinancing: My Income Is Too Low

Refinancing: I Can’t Because I Just Changed Jobs

• Applicant’s work history shows increasing responsibility and earnings.
• The borrower is financially strong enough despite frequent job changes.

Fannie Mae specifies that “if the job changes are for advancement or higher wages, these changes should be viewed favorably.” A borrower with a long job history that indicates a variety of positions and income increases will be viewed favorably, just as an applicant with a short history due to college or job-training can also be viewed favorably.  

Applicants with a series of short-lived working stints in a variety of industries tend to be the exception. Fannie Mae’s Correspondent Lending Guidelines say, “Evaluation of history of employment, ability to generate similar income consistently, number of years in the same field of work, specific educational background and sources of any additional compensation must indicate the income can be expected to continue.”

When it comes right down to it, Chandler’s new job turned out to be in the same field as his previous one and offered a higher salary. He and Emily had no trouble refinancing and got a better loan.

Mortgage & Home Equity Refinance

Home equity refers to the value of a property and the amount of loans against it.

In the above example, we show a starting appraised value of $200,000, then subtract the home loan balance of $150,000, arriving at the owner’s equity which is, in this case, $50,000. Home equity can also be referred to as loan-to-value (LTV). To calculate the LTV, take 100% minutes the percentage of home equity. In the example above, the homeowner has 25% home equity, putting LTV at 75%.

Calculating Your LTV

By simply dividing the refinance loan amount by your home’s estimated value, you can calculate your LTV.

When researching and requesting mortgage rates from lenders, you will need to provide them with a reasonable estimate of your home’s value. Claiming a value of $200,000 when the actual value is $180,000 will result in a higher LTV. This can cause your overall mortgage rate to increase, or your loan to be denied altogether.

The Home Appraisal

When a lender orders a home appraisal, it is to create an independent estimate of the worth of the property. Here are the things that will be analyzed during an appraisal:

• Surrounding property prices
• Supply and demand for homes in your area
• Trends in price movement, either increasing or decreasing
• Overall condition of the home as compared to other homes in the area
• Size of home and lot
• Zoning
• Any hazardous or questionable conditions that may affect the livability or marketability of the home

Despite appraisals being conducted according to this set of rules, appraisals from different lenders will rarely be the same. Appraisals by private lenders are often quite subjective. Some lenders may also rely on automated valuation models, which are the tools used to examine recent sale prices in your area. Appraisals conducted by automated valuation models rarely include an in-person home visit. While AVMs are one of the fastest and least expensive options for mortgage approval, an AVM cannot see the $100,000 worth of remodeling you have done to your home in order to increase its value. In these cases, many homeowners prefer a visit from an appraiser in order to more accurately estimate the actual value of your home and property.

Refinancing: Avoiding a Low Appraisal

Though appraisals do involve a certain amount of subjectivity, there are a few simple steps you can take to get an accurate and generous appraisal. First, ensure your home is inviting, clean, well maintained, and smells good at the time of your appraisal. First impressions and the general atmosphere of your home can help get you a more generous appraisal.

Second, provide an accurate layout of your home’s plans, as well as any improvements that have been made and the cost of those improvements. Ensuring these plans are accurate is integral to the success of your appraisal. According to the National Association of Realtors, errors often occur in floor plans or dimensions, which can easily result in a lower appraisal than expected.

Inaccuracies in paperwork aren’t the only cause of undervalued appraisals. Thanks to a reform called the Home Valuation Code of Conduct, lenders are unable to select appraisers. Because of this, there has been an uptick in appraisals being conducted by underqualified appraisers or those who may not be best suited to the particular job. This has lead to a significant increase in undervalued appraisals.

Luckily, there are ways to avoid getting stuck with inexperienced appraisers. Homeowners can check with their lender to find out when their appraisal will take place, and get the name of the appraiser. Given enough time, homeowners can look up the name of their appraiser, determine their expertise, find out how long they have been licensed, whether they have experience in your area, and determine whether or not they will be a good fit. In some cases, given enough time, you may be able to ask for an alternate appraiser.

Refinancing: Disputing a Low Appraisal

In the event that your appraisal comes in surprisingly low, you may be able to request a reversal if the low appraisal is due to an objective error. Wrong square footage or sales price can, for example, show that the valuation of your home was incorrect. In most cases, once the appraisal has been made, the homeowner will not be able to change the resulting valuation by arguing for that they view their home as worth more than its appraised worth.

Should you choose to dispute a low appraisal, there are right and wrong ways to do so. You should start by downloading a form to make it easier for the appraiser to make the revisions. Appraisers tend to work under tight time constraints, meaning they tend to be unwilling to change or revisit appraisals once they are complete. Complete this form created by an appraiser, and forward it to your loan officer. Your loan officer can then pass it on to the appraiser or underwriting department for consideration.

The next solution is simply to order a second appraisal. Many homeowners are hesitant to do this because it means additional fees and stress but can be worth it to receive a higher appraisal valuation. If you choose to go this route, ask your loan officer to not submit your original low appraisal value. Request a new one and be sure to do your research on your new appraiser to ensure you don’t get stuck with the same issue again. Often times, if the second appraisal comes in higher, your lender will be willing to consider it for refinancing approval. If your second valuation comes in low, you may need to face facts and understand that your property is worth less than you initially believed. 

Lastly, if you are convinced and certain that your home is worth more than the appraisal value, you can always begin the application process over again with a different lender. This will allow you to utilize a different appraisal service, and hopefully, avoid low-ball estimates.

Is Refinancing Possible With Bad Credit?

Refinancing with bad credit, while more difficult, is not impossible. Loans are approved based on the entire application, not one singular element. Refinance underwriters look at income, home equity, assets, payment history, and more, in addition to credit score. A low credit score can be offset or made irrelevant by higher equity, excellent income, and excellent payment history.  

Though it is possible to get a loan with bad credit, it has become more difficult over time. The majority of lender programs cite minimum credit score requirements, and individual lenders often have even stricter policies for their applicants. The best advice we can give to the homeowner with bad credit is to work to improve their scores and investigate a variety of mortgage lenders. Spending a few years to improve your credit score even by a few points can mean the difference between denial and approval.

Government-backed loans tend to be more forgiving than private or conventional loan programs. Homeowners with low credit scores should consider an FHA streamline refinance if their current mortgage is government-backed, as streamline programs do not require credit underwriting.

Refinancing for Other Reasons

Other than finding a lower interest rate or improving the cost of monthly payments, a common reason people refinance is in the event of a couple splitting, or to get rid of mortgage insurance.

Keeping Your House After a Divorce

Even after a divorce, both parties whose names are signed to the loan remain obligated to make mortgage payments. In these situations, the easiest and least stressful option is to refinance under only one name, the name of the party that will remain in the house.

Refinancing: Eliminating Mortgage Insurance

One of the reasons some homeowners refinance is to get rid of private mortgage insurance (PMI.) PMI cancellation can be requested once your loan balance hits 80%, and is automatically canceled once you reach 78%.

In some cases, if your home’s value has increased past the point of requiring PMI, you cannot benefit unless you refinance. If you purchase a $300,000 home and finance at 95% with a 4% interest rate, it would take 55 payments before you would qualify for PMI cancellation. Should your home appreciate at just 4% a year, you can cancel your PMI in only 34 payments. By saving on 21 PMI payments, you may even be able to cover the costs associated with refinancing.

Unfortunately, for homeowners with a newer FHA mortgage, PMI cannot be canceled regardless of home value increase or loan balance. FHA loans now require mortgage insurance premiums which last for the lifetime of the loan. If you want to get rid of MIP on an FHA loan, the only way is to refinance to a conventional loan.