The aim of mortgage refinance is to get lower interest rates to reduce your overall payment.
However, this can be tricky and could make you part with more cash than you planned.
There are many ways homeowners can refinance their mortgages. Here are some tips that can help you with the process.
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Your credit score determines the interest you'll be paying on your loans.
If you are refinancing your mortgage, your goal should be getting a reduced interest rate on your monthly payments. One way this can be achieved is by improving your credit score.
This makes you look more creditworthy in the eyes of the lender, which can result in reduced interest rates. A one-point increase on your credit score increase could reduce your mortgage fees by one percentage point.
That’s $100 for each $1000 borrowed. To have a clear picture of your credit score, you can request a report from any of the credit reporting agencies.
If you don’t know the current value of your home, you could be paying too much to refinance your mortgage.
Your home equity determines how much money you can receive to refinance your existing loan. Less home equity reduces your loan-to-value ratio which could translate to higher rates.
Adequate equity can get you a lower interest rate and eliminate extra costs such as private mortgage insurance.
There are several ways you can get a realistic estimate of your home’s value.
You can meet with your local real estate agent and request a Broker’s Price Opinion (BPO) or Comparative Market Analysis (CMA).
You only have to pay an appraisal fee, a small sacrifice compared to the additional costs you would be paying if you do not value your home properly.
You can tap into your home equity to increase your credit score, but also cash flow pipelines.
Most people make the mistake of using their home equity loans to fund emergencies or short-term needs. This only further puts them deeper into debt. The best way to make optimal use of your home equity is by using it to invest or start up a business.
The extra cash that comes from the investment or business can be used to make mortgage payments, and increase your credit score and net worth. When the lender considers your assets, cash flow, and improved credit score, this can get you a lower interest rate on your refinancing.
To get the best refinancing deals, you should compare and contrast refinance rates from different lenders.
This allows you to know which rates would work best for you and get you higher value for your money.
Requesting from one lender limits your options and skews your view. Try to get quotes from as many as five lenders, then compare to get the best deal for you.
When refinancing, you can consider applying for a shorter loan term.
This allows you to pay off the debt faster and at a much-reduced cost because you pay less interest during the span of the loan.
For example, refinancing from a 30-year mortgage into a 15-year loan, you pay only half the interest - which reduces the overall amount you would pay.
The only downside is that the monthly payments will increase, but if you consider time as a valuable resource, this may be a small price to pay for owning a home.
Opting for a fixed-rate loan instead of one that is adjusted for inflation and interest rates can help you pay less when refinancing.
If you refinance with an adjustable-rate loan, interest rates may go up in the future, thereby making you pay more. However, a fixed-rate loan remains the same during the term.
This allows you to plan your monthly expenses and does not put you under undue financial pressure that may come with the changing of interest rates.
Refinancing your mortgage can be a way to ease off the financial burden of owning a home and setting your finances for better performance.
However, the lure of getting extra cash to pay off an existing one can blind us to the obvious danger of refinancing. Remember that your home is the collateral for the loan, as such, if you do not plan properly, you could lose it in the process.
By putting these factors into consideration, you can make the most of refinancing your home and come out financially stronger!
Editor's note: This article was originally published Oct 4, 2021 and has been updated to improve reader experience.
Photo by Paul Kapischka on Unsplash
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