This post originally appeared on Smart Asset.
With mortgage rates still low, it makes sense to consider a refinance if you’re trying to save on interest or lower your monthly payments. Refinancing your home can be time-consuming. Depending on your situation, you may find it difficult to get approved for a new loan. If you’re planning to refinance, there are a few things you should do to make sure you’re ready first.
1. Check Your Credit
Your credit score speaks volumes about how responsible you are when it comes to managing your finances. Even a single black mark could significantly hurt your chances of getting approved for refinancing. Things like late or missed payments, maxed-out credit lines and multiple inquiries can cause your score to nosedive. So you need to know what your credit report says about you before potential lenders see it.
You can get a free copy of your report here. Take some time to review it carefully to look for inaccurate or incorrect information. If you find something that you think is wrong, you’ll need to initiate a dispute in writing with the reporting agency. The agency will investigate your claim and remove or correct the information if necessary, which can give your score a boost.
If everything on your credit history appears to be correct but your credit score’s not that great, you’ll want to work on building it back up before refinancing. Paying your bills on time, keeping your balances low and minimizing the number of times you apply for credit can help your score to improve over time. The higher you can get your score, the lower the interest rates you’ll qualify for. So it pays to clean up your credit even if it means you have to wait a little longer to refinance.
2. Assess Your Home’s Value
Generally, lenders won’t be willing to work with you on a refinance deal unless you’ve built up some amount of equity in your home. For a conventional loan, you may need to have at least 20 percent equity before you can qualify.
If you’re underwater or have very little equity in your home, it doesn’t mean you’re automatically excluded from refinancing. But you may have to look into alternative options, like the FHA Streamline Refinance program or the Home Affordable Refinance Program. These programs have specific requirements so you’ll need to find out if you’re eligible before you apply.
Once you’ve figured out what your home is worth, you’ll have a better idea of whether or not you’ll be able to refinance. If you don’t have a lot of equity, you may want to consider investing in a few home improvement projects to build it up. Adding on a new bathroom or renovating your kitchen can yield big returns. But if you’re on a tight budget, something as simple as a few coats of paint and a little landscaping can go a long way towards increasing your home’s value.
3. Do Your Research
When you’re shopping around for a lender, doing a little research can ensure that you get the best deal. While you may tend to zero in on the interest rate that a particular lender is offering, you also need to pay attention to other key details such as the loan term and the closing costs.
For example, if you’re considering refinancing a 30-year loan to a 15-year mortgage to try and pay your home offer faster you should be aware of all the pros and cons. You’ll pay less in interest with a shorter loan term but you’ll be tying up a bigger chunk of cash each month in payments. You’ll need to decide whether your budget can handle the switch.
You should also figure out what you’ll have to fork over in closing costs if you decide to refinance. This includes things like the loan origination fee, the application fee, the appraisal, title search and recording that you’ll have to pay for before your refinance is complete. Closing costs can easily add up to several thousand dollars so you’ll want to make sure you’ve got enough cash on hand to cover them.
Refinancing can be a smart way to save money. The time you spend preparing beforehand can pay off big later on. With a little organization and some careful planning you can potentially avoid hitting any costly snags during the refinancing process.