10 Challenges You Might Face When Refinancing a Mortgage

With today’s refinance rates sitting near record lows, now’s a good time for many homeowners to look at swapping their existing mortgages for new loans with better terms. But beware these challenges you might face if you decide to refinance.

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You’ll generally qualify to refinance a mortgage with a credit score of 620 or above (though you may need a higher score for a cash-out refinance). But that doesn’t mean some lenders won’t impose stricter requirements, so if your score is only mediocre, you may be denied a new home loan. And if your score isn’t in the mid-700s or higher, you may not qualify for the more competitive rates out there.

Your debt-to-income ratio measures the amount of monthly debt you have relative to your income. If yours is too high, you may not qualify to get a new home loan before you pay off some existing debt.

Refinance lenders want reassurance that you’ll be able to pay your new home loan, so to that end, yours will want to see that you have a steady, reliable income source. If you’ve just switched jobs, a lender may be more hesitant to take you on, though a letter from your employer confirming your solid job standing might help make your case.

As just mentioned, your lender will want to know that you’re capable of paying your new home loan, so if your income is variable and not guaranteed (say, because you’re self-employed), you may have difficulty qualifying for a mortgage. But that doesn’t mean you won’t get to refinance. Just be prepared to provide extra documentation to your lender. You may, for example, need to provide copies of freelance contracts showing you have work coming in.

Refinancing means paying closing costs to finalize your new loan that could equal 2% to 5% of the sum you’re borrowing. If you’re not sure how long you’ll keep living in your home, you’ll risk not breaking even from those closing costs to actually enjoy some savings. For example, if it costs you $4,000 to refinance but doing so saves you $200 a month, it’ll take 20 months to break even. If you end up moving before then, you’ll lose out by refinancing.

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A lender isn’t going to give you a new mortgage if your home isn’t worth enough to cover its balance. While home values are up right now on a national level, if the value of yours has declined, you may be denied a refinance. For example, if you owe $300,000 on your mortgage but your home’s market value is only $250,000, that’ll be a problem.

Usually, you’ll need to wait six months to refinance a mortgage with your current lender. If you’re within that time frame, you may be denied a new loan, though you can generally get around that by refinancing with a different lender.

Refinancing really only pays when you can lower the interest rate on your loan by about 1% or more. If your credit score isn’t great or you already have a competitive rate on your mortgage, a refinance may not make sense.

Usually, the refinancing process involves having someone come to your home to perform an appraisal. A lender will then use that appraisal to verify that your home is worth enough to support the loan amount you need. But having someone come into your home during a pandemic may not sit well with you, and unfortunately, that could end up being a problem. That said, some lenders are waiving home appraisals for refinances, so if you find one that does, you’ll avoid that issue.

A lot of people are clamoring to refinance these days because rates are low, so lenders are inundated with applications. The result? You may find that your closing is delayed beyond what you’d normally expect. It generally takes about 30 to 45 days to close on a refinance, but given recent demand, you may find that it takes even longer.

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A lot of homeowners are refinancing these days without a hitch. But if you’re looking to refinance, be prepared for these hiccups. The good news is that they’re not all insurmountable, but it’s important to gear up for them just in case.