What Is the Best Way to Refinance?

When making the decision to refinance, consider all your options and pick a plan that will best help you meet your financial goals.

+ What types of loans are available for Refinancing?

Fixed Rate: With established and predictable monthly mortgage payments.

Adjustable Rate: The rate of an adjustable-rate mortgage is designed to change with the movements of the market index to which it is linked.

Cash Out Refinance: While rate-term refinances can change the repayment terms or decrease the interest rate, or both, a cash out refinance provides a higher loan amount than the current mortgage. This excess then can be used to consolidate debt, put toward home improvements, or dedicate to educational funds or other investments.

+ Which Loan Term is Right for Me?

Repayment schedules can vary greatly. Fifteen to 30 years are the most commonly found repayment schedules, with the 15-year mortgages typically offering lower interest rates than those found with 30-year mortgages. Likewise, you would pay substantially less in total interest if you were to stay with the 15-year mortgage through the life of the loan.

A shorter term is often the best choice if you plan to own the home for the full life of the loan. Although this can set you up with higher monthly payments, it will decrease your interest rate and reduce the amount of interest you pay overall.

If you have plans to own the home for less than seven years, however, you may be best served by going with a longer term of repayment. While this could set you up with a slightly higher interest rate, it could provide you with lower monthly payments since they are spread over a longer period of time.

Preparing for a Refinance Closing

Your current mortgage will be closed out, and you'll begin again under the new loan structure established in your refinance agreement. We'll stay in good contact as the closing date approaches. Being well prepared will be beneficial for the refinance closing date. Here's what you need:

Documents

Verify that you have all the documents you need to move forward into closing.

+ Documentation Needed

HUD-1 Settlement Statement: The itemized list of the final credits and charges, for both you and the seller, based on the terms of the contract. You should receive a copy of the HUD-1 at least one day prior to the closing for your review.

Deed of Trust or Mortgage: The documents in which you agree to a lien on your property, as security for repayment of your home loan.

The Promissory Note: The mortgage promissory note is a legal “IOU” that represents your promise to pay the lender according to the agreed terms, including the dates on which you must make your mortgage payments and where they must be sent.

A cashier’s check made out to the title company to cover closing costs. The title company will accept wires as well. Cash, personal checks credit cards won’t be accepted.

Government-issued identification card with photo for the notary.

Credit: Review your credit history.

To make sure you have good credit standing, refresh yourself on how your credit score is derived and also on ways to keep your credit clean.

+ How Your Credit Score Is Determined

Your credit score is formally known as a Fair Isaac Corporation Score (commonly called the FICO® score). It ranges from 300 to 850 and is calculated according to the following risk factors:

Payment History (35% of score)

  • Payment information on several types of accounts
  • Public record and collection items
  • Details on late or missed payments – specifically:
    • How late they were
    • How much was owed
    • How recently they occurred
    • How many there are
  • Amounts Owed (30% of score)
  • Amount owed on all accounts
  • Amount owed on different types of accounts

Whether you are showing a balance on certain types of accounts

  • How much of the total credit line is being used
  • How much of installment loan accounts is still owed

Length of Credit History (15% of score)

  • How long your credit accounts have been established, in general
  • How long specific credit accounts have been established
  • How long it has been since you used certain accounts
  • New Credit & Inquiries (10% of score)

How many new accounts you have

  • How long it has been since you opened a new account
  • How many recent requests for credit you have

Types of Credit (10% of score)

  • What kinds of credit accounts you have and how many of each
  • Total number of accounts you have

+ How You Can Improve Your Credit Score

If your credit score is keeping you from getting a better mortgage rate, here are a few things you can do to clean up your credit history.

Obtain a complete copy of your credit report from the three leading reporting agencies:

Review your credit report line-by-line, specifically searching for errors, omissions, duplications and "common name" errors.

  • If you encounter errors, you should write out exactly what should be corrected and why. You are able to add 100 words or less to reports on questioned items.
  • You can also find assistance through credit counselors, who are available through the various credit bureaus.

Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated to remove the disputed items from your records.

The Fair Isaac Resolution Resources Helpline is 1-800-777-2066.

Most merchants are willing to negotiate customized repayment plans for those that find themselves with considerable debt.

  • Chapter 13 bankruptcies stay on an individual's record for 7 years.
  • Chapter 7 bankruptcies stay on an individual's record for 10 years.

Judgments, Garnishments or Liens

  • Liens, garnishments and judgments are typically indicators of an unstable borrower. Any judgments, garnishments or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.

Delinquent Child Support

  • Any outstanding child support payments must be brought current, and specific documentation from the credit-reporting agency stating this fact must be in the file with no exceptions. Because of the seriousness of the delinquency/default, which in many states can cause incarceration, a letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed-upon, but not yet completed, payment plan.

Insurance

Confirm that your insurance policies provide appropriate coverage for your home's value and contents. Also, double-check that the policy reflects the name of your refinance lender as the payee for losses.

Rate

Consult with your PrimeLending loan officer about locking in your interest rate before you close. Locking a rate before you close will provide protection for you if rates should rise before your closing date.

Escrow

Examine your current loan's escrow account and determine if a surplus or deficiency of funds exists.

Closing Costs

Arrange to bring to your closing appointment a cashier’s check made out for the exact amount you'll need.