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Don’t Be Taken Advantage of When You Refinance

You’ve defined your refinancing goals – but making the wrong choices before you refinance could prevent you from getting the lowest mortgage rate, weighing you down for years with a large monthly payment or private mortgage insurance (PMI). How can you steer the process and get lenders to offer you their best mortgage rate?

Position yourself to avoid a refinancing nightmare.

1. Manage and improve your credit score
Lenders assess the credit score, debt-to-income ratio, and the loan-to-value ratio (LTV) when qualifying a borrower for a mortgage. Each lender is different, but most require a minimum credit score of 640 to qualify. For more favorable mortgage rates, however, you’ll need a credit score of 740 or better.

2. Reduce your debt-to-income ratio
The debt-to-income ratio factors the minimum monthly payment on all of your debt as compared with your gross monthly income, and most lenders won’t approve a loan if the ratio is greater than 41 to 43 percent. If you have credit card debt and cannot pay off your balances all at once, you could pay down the balance on each card to less than 25 percent of your credit limit and avoid taking on new debt.

3. Save money to avoid private mortgage insurance and to pay for closing costs
The loan-to-value ratio is another metric lenders use to evaluate whether to approve your refinance. For conventional loans, most lenders require PMI if a borrower’s equity stake is below 20 percent. That means you could avoid the PMI requirement (and possibly get a better rate) if you infuse cash into the refinance transaction. Talk with your lender about how this option can affect your overall financial situation, and make sure to retain enough cash to pay for closing costs. They can amount to 6 percent of the loan in some states.

4. Organize your documents
Be prepared to document every dollar that goes into or out of your bank account for as long as six months before you close on your mortgage. Normal payroll deposits and monthly expenditures are less likely to be scrutinized; but don’t transfer money between accounts, open new accounts, make large purchases, or deposit cash until after your loan funds.

Above all, shop! Compare lenders, mortgage rates, and fees.

5. Consult several lenders
You may think it easier to refinance with your current lender – but not shopping and comparing lenders, mortgage rates, and fees is a sure way to put yourself at a distinct disadvantage. One study even showed that borrowers working with brokers saved $800 on fees by getting a second quote and $1,300 by getting a third quote. It pays to shop for rates and lender fees.

To get the best mortgage rate and the most favorable terms over the length of your loan, you should consult as many different lenders as possible. Consider your community bank, online-only lenders, credit unions, mortgage brokers, and national lending institutions. The easiest way to shop lenders and rates is with a mortgage comparison shopping website. With GuideToLenders, you’ll get personalized quotes from multiple lenders so you can quickly compare current mortgage rates and fees side by side – and there is no obligation. The service is 100 percent free.

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