Refinancing can mean lower payments, less total interest costs over the life of the loan, and possibly some extra cash for home improvements. Currently, interest rates are at historic lows — in fact, Black Knight’s Mortgage Monitor June 2019 report states that there are 8.2 million homeowners that could benefit from a refinance.
In this refinancing guide, we’ll walk you through the pros and cons to determine if a refinance makes sense for you and your family.
Before you refinance as a single mom
Refinancing isn’t a decision that should be taken lightly. In general, refinancing the family home must align with your overall financial goals and save you money. Below are four things to do before going down the refinance path to ensure that you’re making the right financial decision.
Determine your refinance goals
“Ask yourself this key question,” Says Charlie Scanlon, president of Phoenix Credit Consultants, “Is it in your best interest to stay in the marital home or will it be a financial struggle?”
If the home is too big, or you’d like to move to a different neighborhood, then you should look at a purchase home loan, not a refinance. But, if you want to stay in your home, consider your reasons for refinancing.
Some common refinance reasons:
- Lower monthly mortgage payment and interest rate
- Remove private mortgage insurance (PMI)
- Fund home improvements or major repairs
Determining your refinancing goals will help you decide which of the refinance loans is best for your situation.
Improve your credit
“Frequently in cases where there was a divorce, credit ends up damaged,” Scanlon explains. “This happens because of the expenses associated with attorney fees and the additional costs associated with maintaining separate households during the divorce litigation.” Credit can also be impaired because of one or both spouse’s vindictiveness.
It’s important to take a close look at your credit score and history before a lender does. If a lender pulls your credit it becomes a “hard inquiry” and can affect your credit score, but if you pull your credit it’s considered a “soft inquiry” and won’t affect your number. This will give you time to address any issues before speaking to a lender.
A free source like AnnualCreditReport.com is a great place to start — federal law, in fact, allows you one free report every 12 months from each credit reporting company. If you have a low credit score, you should try to increase it. It will take time, but in general, the higher your credit score the lower your interest rate.
Some actions to take that can help increase your credit score:
- Set up automated payment systems, especially if you tend to forget to pay bills
- Bring all of your bills current if you’ve fallen behind on payments
- Dispute any errors on your credit reports
Include child support income
If you receive child support or alimony, you may be able to include it as part of your income to qualify for a refinance loan. For example, Fannie Mae guidelines state you must receive this income for three years after the date of the mortgage application. So, if your child is 15 years old and support stops when he reaches 18, this income won’t be considered. Also, you must document that you’ve received child support for at least the past six months.
Comparison shop lenders
Almost half of consumers don’t comparison shop for home loans, according to research from the Consumer Financial Protection Bureau (CFPB). This means a lot of homeowners are losing out on substantial savings. Even half of a percentage point decrease can amount to a significant amount of money, especially in total interest costs over the life of the loan.
It’s best to get quotes from three to four lenders to ensure that you’re getting the best interest rate for you. Also, if lenders know that you’re shopping around, they may waive certain fees or offer better terms to earn your business.
Read more: How to Comparison Shop for a Mortgage
Consider the costs of refinancing
“Borrowers should keep in mind the fees associated with any refinance, including closing costs and other charges,” says Scanlon.
If the costs to refinance are more than what you’ll save from a refinance, then it may not be the right financial decision. But, there are some things that you can do to make sure the associated costs for your refinance are as low as possible.
Negotiate eliminating the prepayment penalty
Some lenders charge a prepayment penalty for paying off a loan early. A refinance is considered a prepayment, because you’re technically paying off your current mortgage loan with a new refinance loan. If there’s a prepayment penalty in your contract, ask your refinance lender to negotiate to eliminate the charge or at least to reduce the amount.
Get a loan estimate
After you’ve submitted your refinance application, the lender is required by law to give you an estimate of all of the fees and closing costs within three business days. This is called a Good Faith Estimate or GFE (see an example GFE). The GFE also documents your loan amount, the terms of the loan, if a prepayment penalty exists, and your monthly payment amount. Be sure to take your GFE to loan closing to make sure none of the amounts have changed drastically.
Finance closing costs
Closing costs are all of the fees associated with loan processing or purchasing a property. For example, the appraisal, title report, and upfront mortgage insurance are all considered closing costs. Most closing costs are paid out-of-pocket and can range from 1%-5% of the loan amount.
However, you may be able to roll your closing costs into your loan. This is dependent on loan type — conventional refinances allow it, while FHA streamline refinances don’t. Adding closing costs to your loan amount may raise your interest rate, but you won’t be required to come up with any cash on the day you sign the refinance loan documents.
Refinance home loans for single moms
The refinance home loan that is best for you is going to depend a lot on your financial goals. In general, streamline refinance loans are intended to lower your monthly payment and interest rates, while cash-out refinances allow you to tap into your earned equity to pay for large purchases. Below is an overview of these common refinance loan options.
Streamline Refinance. This refinance loan type is a good choice if you’re looking to lower your monthly payment and interest rate. It’s relatively easy to qualify for requiring minimal paperwork and no appraisal. Also, if you’ve earned 20% equity in your home and are still paying private mortgage insurance (PMI), then a streamline refinance can remove this monthly cost as well.
Cash-out Refinance. If you’re looking to fund large home repairs or need to consolidate high-interest credit card debt, then a cash-out refinance allows you to tap into your earned equity and turn it into cash. The process for these loans are similar to purchase loans — income verification and a home appraisal is required to qualify. You can generally borrow up to 80% of the home’s value in cash, but the amount will ultimately be determined by how much you owe and your home’s current value.
If you still have questions, then reach out to a licensed mortgage professional to discuss your financial situation and goals.