Refinancing can be a great way to save money or tap into your home’s equity. Before you jump in and get too excited, though, know the top mistakes that many borrowers make while refinancing. These tips can help you get the most of your refinancing process.

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Refinancing When it Doesn’t Make Sense

Many borrowers jump at the chance to lower their interest rate, not giving it a second thought. While a lower interest rate does sound great and it can save you money, it is only beneficial in certain situations. Since refinancing costs money, you have to determine at what point you’ll break even. This means paying off the closing costs you had to pay to refinance and reaping the loan’s savings.

You can figure out your breakeven point with the following calculation:

Total closing costs/Total monthly savings = Break-even point

Your total monthly savings is the difference between your original mortgage payment and the new payment. If your break-even point is 36 months or less, it may make sense to refinance, but only if you’ll be in the home for a while afterward. Let’s say your break-even point was 24 months and you knew you would move in 36 months. It doesn’t make sense to pay all that money to refinance just to save a little money over 12 months. But if you knew you’d be in the home for another five years, for example, then it may be worth it.

Not Changing Your Term

When you refinance, you basically start your term over again. It’s also a chance to get a fresh start too. If you keep the same term, it’s like you start over from the beginning. For example, let’s say you have a loan now with a 30-year term and you’ve paid on it for five years. Interest rates drop so you want to refinance to save money. If you take another 30-year term, you just added five years to your loan. If instead, you take a 25-year term or less, you maintain the same progress, or put yourself in a better situation.

Before you take the lower term, make sure you can afford the payment. Lower terms have higher principal payments because you pay the loan off in a shorter amount of time. Don’t make the mistake of taking a payment that you can’t comfortably afford, as that will put you at risk of defaulting on your loan.

Not Checking Your Credit Score

Refinancing may not make sense if you don’t have the qualifications to get a good interest rate. Many people assume their credit is fine, but don’t check it. You can check your actual credit score through programs offered by banks and credit card companies. Most companies offer free access to your credit score. Watching that number can help you know where you stand. If it seems low, it may be time to pull your credit report to see what’s bringing your score down.

You can also pull your free credit reports from www.annualcreditreport.com. You have access to your credit report from each of the three bureaus annually. You can pull them all at once or one at a time. While they don’t include your credit score, your credit history is what makes up the score. If you notice late payments, high credit balances, or collection accounts, take care of the problems so that you can increase your score before you refinance.

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Not Checking Your Home Value

Don’t just assume that your home value increased, that’s not how it works. Real estate values fluctuate all of the time. You can easily check your home’s value using an automated tool online. While it may not be extremely accurate, it will give you a ballpark estimate of your home’s value.

If you want something more concrete, look up the sale price of homes similar to yours in the area over the last six months. This will give you an average price that your home would sell for on the current market. This will be a good indication of the market value of your home.

Many people don’t even realize they are upside down on their loan or they assume they have more equity in the home than they have. Refinancing may not make sense if the home’s value isn’t as high as you thought. The higher your LTV is, the higher the interest rate most lenders will charge you.

Changing Jobs Right Before Applying

Just like when you applied for a purchase loan, lenders want a stable employment history. They like to see you at the same job for at least two years. If you recently changed jobs, it could be harder to find a willing lender. The only exception to this rule is if you changed jobs but stayed within the same industry. If you have a history of success within the industry, lenders may be more willing to accept the newer job change.

Using Your Current Lender for the Refinance

Your current lender may be a good resource for your refinance, but don’t assume they offer the best rate or terms. Shop around and get quotes from several lenders. See what is available to you. Some lenders may have different programs that help you get even more out of your refinance than your current lender can offer.

You may end up back with your current lender and that’s acceptable, but shop around first. You should know beyond a reasonable doubt that you are getting the best deal that is available to you today.

Before you refinance, make sure you have all of your ducks in a row. Don’t just refinance because you can. Do so because you’ll save money now as well as over the life of the loan. If the new loan has a lot of closing costs or a long break-even point, think of your other options before putting yourself in a tough financial position.

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Many homeowners refinance their mortgage for a variety of reasons. Sometimes it’s just to get a lower interest rate to make the payment more affordable. Other homeowners refinance in order to tap into their home’s equity.

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No matter the reason that you want to refinance, can you do so if you don’t live in the home?

Owner Occupancy Requirements

Technically, it’s much easier to refinance an owner-occupied property, but you don’t have to live there if you want to refinance. This is only because you’ll have more loan options. If you live in the home, you can use any of the following programs to refinance:

• FHA
• USDA
• VA
• Conventional

If you don’t live in the home, your options are much more limited. You can’t use any of the government-backed programs for a non-owner occupied home – they are strictly for primary residences. The only options you have are Fannie Mae or Freddie Mac conventional loans, but there are a few exceptions.

VA Loan Exceptions

If you already have a VA loan, you may be able to refinance with the VA streamline refinance program. Otherwise known as the Interest Rate Reduction Refinance Loan, this program allows you to refinance your loan with little verification and unlike the purchase VA loan, you don’t have to certify that you’ll live in the home.

Technically, VA loans are only for owner occupancy use, but you can get an exception from the VA for any of the following reasons:

• You outgrew your home (your family size increased and is too large for the home)
• Your job relocated you at least 50 miles from your current home

The VA must approve your reason for not occupying the property and you must refinance with the VA streamline program in order to move out of your VA financed home. If you keep your VA purchase loan, you certified that you’d live in the property, which means moving out and not selling the home violates your agreement.

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FHA Loan Exceptions

The FHA offers a similar streamline refinance program that the VA offers. The difference with this program is that you must certify that you’ll live in the home for at least 12 months after refinancing with the program.

After 12 months pass, you may move out of the home and rent it out or use it as a second home. The VA streamline refinance doesn’t have the 12-month requirement, but you must have the approval of the VA to move out of the home while keeping your VA financing.

Conventional Loan Options

Now when it comes to conventional financing, you have many more options, even if you don’t live in the property.

Conventional loans typically provide the lowest interest rates and most attractive terms. Most notably, they don’t charge Private Mortgage Insurance once you owe less than 80% of the home’s value. FHA and USDA loans, on the other hand, charge the mortgage insurance for the life of the loan regardless of your loan-to-value ratio.

Whether you want to refinance the loan to adjust the rate/term or you want to take cash out of the home, you can borrow up to 75% of the home’s value with a conventional loan refinance. In order to qualify, you’ll need:

• At least a 680 credit score unless you have a much lower LTV than 75%. In these cases, Fannie Mae/Freddie Mac may allow a credit score as low as 640. This is the case only if you have a debt-to-incomer ratio lower than 36%
• If you have a DTI higher than 36%, but lower than 45%, you’ll need a minimum credit score of at least 700 for most lenders, if they allow the higher DTI
• At least six months of reserves on hand. Refinancing an investment property or even a second home is riskier than refinancing a primary residence. If you can’t make the payments on your primary residence, you will probably work much harder to find a way to make ends meet than you would with a second home or investment property.

The Waiting Period

Many loan programs require a waiting period or seasoning period before you can refinance your loan, whether you live in the home or not.

FHA loans require you to wait six months before you use the FHA streamline refinance program. This gives the FHA and lender a chance to see that you can afford your payments and that refinancing will work to your benefit. If you want to take cash out of your owner-occupied property, the FHA doesn’t have a seasoning period. However, since most borrowers put down the minimum 3.5% on an FHA home purchase and the FHA only allows a maximum 85% LTV, chances are that you’ll have to wait several years before you have any equity in the home.

VA loans typically require a six-month seasoning period for both the VA streamline refinance and the VA cash-out loan. Typically, VA loans are only for owner-occupied properties, but you may be eligible for an exception that we discussed above for the streamline refinance. If you want to take cash out of your home’s equity, you’ll need to prove that you’ll live in the home, though; there aren’t any exceptions for VA cash-out refinance loans.

Conventional loans don’t have a waiting period for a rate/term refinance, but if you want to take cash out of your home, whether an owner-occupied home or investment home, you’ll need to wait at least six months. The only exception to this rule is if you paid cash for the home. This is called ‘delayed financing.’ Many investment buyers pay cash for the home to get around any issues with the property that would prevent mortgage approval. They fix the home up and then tap into the equity with a cash-out refinance to recoup some of their investment.

The bottom line is that you don’t have to live in the home to refinance it, but it’s certainly easier if you do live in the home. Any mortgage that you get on a home that you don’t live in poses a high risk of default for lenders. They will generally charge higher interest rates, require higher fees, and have stricter requirements to qualify for the loan.

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