By Sabrina Karl
When mortgage rates dropped to historic lows early this month, refinancing applications shot through the roof. One source compared the mortgage lender industry during that week as similar to Home Depot before a coming hurricane.
Since then, mortgage rates have been yo-yoing given the uncertainty of financial markets during the coronavirus pandemic, as well as the Fed’s two emergency rate drops. But while current rates may not be enticing, recent rate movements have been exceptionally erratic and in these unprecedented times, it’s entirely possible they will drop to lows again.
That’s why it’s good to prepare now (while lenders are catching their breath) if you think you’ll want to refinance if rates drop again. Having your financial situation in order will be necessary if you want your application approved to lock a new low rate.
The first step is to calculate whether you have enough equity in your home to allow for refinancing. You’ll only be able to refinance up to 80% of your home’s appraised value, so if your current mortgage plus any home equity debt exceeds 80%, you’ll need to wait until you pay down more of those balances.
Second, take a look at your other debts. Do you have credit card balances or personal loans you can pay off before applying for a refinance? The ratio of your debt to your income is one of the primary drivers in lender decisions.
Lastly, assess your credit. If your score is below 760, you may want to bolster it before applying to refinance, since the higher your score, the more likely you’ll be approved and the better rate you’ll receive. Paying off debt is one way to improve your score, but also check your credit report for errors and avoid applying for any new credit until after you refinance.