When it comes to refinancing there are a few red flags that show up and change the outcome of the refinance. These red flags may not stop the refi short in its tracks, but there is a good chance that any or all of these will make it so you pay more for the refinance than you would have otherwise. You won’t pay this up front but you will pay it over the life of the loan in a higher interest rate. Some of these can be avoided, some of them can be repaired prior to the loan application, and some of them are just what they are – there’s not much you can do about them. Here are a few things you should know that may drive your refinance rate up.
Refinance Rate Boosters that May be Out of Your Control
When refinancing you are going to have a few decisions to make. First, you’ll need to decide what type of refinance you want. Depending on the type of refinance you choose, you may end up with a higher interest rate. This is one factor that will drive your rate up. Here is an example for you: Joe on the corner refinances his home and pays the closing costs up front. He gets a rate of 3.5% (hypothetically speaking). Harry on the other corner refinances and chooses the no-cost option, which means the closing costs are rolled into the mortgage. He gets a rate of 3.9%. Other than Harry choosing the no-cost option, both of them have identical finances. Oftentimes lenders will increase the interest rate on no cost refinances because there is a slightly higher risk involved.
Another factor that may have a negative impact on the refinance rate is the type of home. Usually single family homes are able to qualify for a lower rate because they are considered less of a risk. A condominium, on the other hand, is considered a higher risk and therefore may incur a higher rate.
Financing Factors you Do Control
The items mentioned above have more to do with the refinance requirements and less to do with aspects that you can deal with beforehand. So first and foremost, your credit score. This one is pretty much on everybody’s list as an item that will drive up your refinance rate. Knowing this, by taking the steps to repair your credit as much as possible beforehand, you may be able to keep the rates low. A low credit score means a higher interest rate.
Your loan term is another decision you can make that will have an effect on the interest rate. Most homeowners opt for the 30-year-term because the monthly payments are lower so the mortgage is more manageable. However, the longer a loan runs, the higher the risk is, so 30-year loans tend to have a higher interest rate. If you refinance to a 15-year mortgage you will more than likely get a lower interest rate. However, you will have higher monthly payments because you will be paying off the loan faster.
Pay attention to your loan size when you go to refinance. If the loan is for a smaller amount, you may get a higher interest rate to ensure profits are made for the lender off of the transaction. On the flip side, however, if the loan is large, past the conforming limits, you will end up with a higher interest rate as well. Keep it within the conforming limits and you’ll more than likely decrease the interest rate.
Last but not least is your loan to value. This one is tricky. If your loan to value is higher than 80% you will be required to get mortgage insurance on the loan. These insurance premiums will drive the monthly price up, but they are necessary because they insure the lender against a possible default. However, you may be able to qualify for lender-paid insurance. If you choose this option the lender will cover the costs of the mortgage insurance. A downfall of this is an increased interest rate.
Most of these red flags are not completely out of your control. They will be determined by the choices you make regarding the refinance. Keep in mind that just because something drives the interest rate up, it doesn’t necessarily mean that it’s a bad move for your finances. It may actually be the best way you have of securing the financing you need. As with any loan, before you sign on the dotted line work out the details with a professional loan officer – he can help you get the loan you need.