As a single mother, you juggle everything from preparing schools lunches to chauffeuring your kids everywhere to keeping your budget on track. You’ve probably been thinking about refinancing your home since mortgage rates now are near historic lows.
Refinancing could lower your monthly payments, let you pay off your loan quicker and even allow you to take out cash for home improvements.
To ensure that you are in a good place to actually refinance and that you understand the steps of a refinance, we have put together top tips to make the experience smoother and less stressful.
“It’s not as hard as you think it might be,” says Michael Wise, founder/CEO of Capstone Direct Mortgage Financing in Thousand Oaks, Calif “You basically need your homeowners insurance, a couple of months of bank statements, your last two W-2’s and two years of tax returns, and proof of paying your mortgage.”
Here are some tips to refinancing your mortgage as a single mom.
Determine your goals
Why do you want to refinance? What are your goals for doing so? How much do you want to save per month? By explaining your goals to your lender, it will help the whole process. They will be able to more easily point you toward the best refinance option available.
Renegotiate the prepayment penalty
Wise believes your current lender might help lower or even get rid of any early payment fee or prepayment penalty when you refinance. Many loans have prepayment fees that will be charged if you pay off the mortgage early. Refinancing is considered paying off the mortgage early, and that means your lender loses out on all that interest. Renegotiating this cost could at the very least save you some money.
Closing costs for a refinanced mortgage could run up to be at least a couple thousand dollars depending on the loan and the lender. But shopping around for the right lender can make a big difference in your payments and interest rate. Get multiple quotes since you don’t need to go with the same bank or lender that your mortgage is currently with.
Improve credit score
If you want a great interest rate on your refinancing loan, then your credit score should be pretty good. Make sure your credit debt is below 50 percent. For instance, if your available credit card allowance is $10,000, get it below $5,000. Your credit score should go up then, Wise adds. But keeping it at 20 percent is even better for a really good interest rate and for lenders to fight over your business. Also, try and have errors removed on your report by writing a credit repair dispute letter. This could go a long way in getting you the best refinance for your situation.
Understand mortgage rules about child support
One pitfall for single moms who get child support is that it does end. Because of this, a lender will be considering how much longer you will be getting that financial boost before approving your refinance.
“Fannie Mae and Freddie Mac guidelines say single moms can’t qualify for a refinance or a mortgage because there needs to be three years remaining on the income,” Wise says. “If they are 15, then they are almost too old, too, to get an approval on a refinance.”
But if the single mom makes enough on her own without adding in the child support or alimony, then this should not be a concern.
Think about getting cash out
With interest rates near historic lows, Wise adds that it is a great time to get cash out during your refinance to upgrade their home.
“That’s an important thing to do. It keeps the values higher and their ability to refinance later on if they need to down the future. A good quality house is also easier to sell when it’s time to sell,” he says.
Consider loan options and terms
If you have a “good” credit score (anything above 680), you could get a conventional refinance loan. The best rates come with 740 credit scores, Wise says, and if you already have 20 percent equity in the home, there will be no private mortgage insurance added on to your monthly costs.
If you are a current FHA mortgage borrower, you can get an FHA Streamline refinance with no income and no asset verification. It definitely shortens home refinancing by waiving so many rules typically required by other refinancing loans. You don’t even need an appraisal of the home.
Home Affordable Refinance Program, better known as HARP, started in 2009 as a government-sponsored program for homeowners to refinance their high-interest rates, underwater mortgages and declining home values.
It still exists and does minimize the amount of documentation usually needed for a conventional refinance program. However, HARP is scheduled to end at the end of 2016, so this option is better used sooner than later.
Get a loan estimate
After you submit your application for your refinance, the lender is required to give you a loan estimate within three days of receiving that application. This will give you an estimate of the fees and closing costs for your loan. It also tells you what your loan terms and monthly payment will be. Check it over to make sure it is exactly what you think it should be. If not, call and ask questions.
Add closing costs to the refinance
If your kid needs braces or you just don’t want to be cash poor, put your closing costs into the loan amount or have the lender add a little to the interest rate to make up for it.
If you’ve been thinking about refinancing to save some money per month or to pay off your mortgage a little earlier than you thought, then it might be a good time to start talking to lenders. The interest rates truly are near historical lows, and no one can predict when they will be going up or how fast they will go up.
You also need to look into whether your home value has gone up in the last few years. That will help you on the equity side and possibly get you out of your private mortgage insurance.