8 Home Refinance Tips to Ensure Big Savings
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Most people obtain a mortgage to buy a home or a real estate property. A mortgage is a loan given to you by the lender to buy your home. You will pay the loan over an agreed period plus interest. Interest is the cost of obtaining your loan and you will pay this along with the principal amount.
The interest expense is not a joke. If you are not careful, you may end up financially incapacitated by the mortgage expense (the loan principal plus interest). This is where mortgage refinancing comes in. There are two reasons why people opt to refinance their mortgage; to lower their cost of credit (Interest rate), or to get some needed cash.
Know the Reason Why You Want a Refinance
Most people make highly implicating financial decisions without a goal in mind. They see their neighbor moving into a new house, they also sell their mortgage to finance a new home that they may not need. This is what I would say is refinancing for the wrong reasons.
Therefore, knowing the reason why you want to refinance will help you ensure big savings. For example, most banks will agree to refinance up to 80% of the value of your home for cash. Let say, your home value is worth $200,000 and you owe $120,000. Your bank may give you $40,000 cash making your new mortgage $160,000.
If your reason for refinancing is to buy a new asset, make home improvements, pay off debt, or add more money to your savings account, the $40,000 from cash-out refinancing will get the job done.
On the other hand, people refinance to get lower mortgage repayments. If you are living in an expensive home and you find yourself struggling to pay your mortgage you may want to refinance. Refinancing in such a case will spread your interest over a longer period and hand over lower monthly payments to you.
Mind your Credit Score
This is arguably, the most important consideration you must take into account when you are looking for a refinance. A credit score shows a history of your financial transactions and shows your lenders your ability to pay back the lent money. If your credit score is below average, lenders will consider you a risky investment. As a result, your refinance loan will come with a higher interest rate. If your score is considered high, lenders will consider you trustworthy and are likely to give you low interest rates.
Work On Your Credit Score
It is not all doom and gloom if you already have a low credit rating. You can work on your credit score by starting to pay your current loans on time. Stick to this every time and you will build a list of timely payments. This will boost your credit rating.
Additionally, limit your usage of credit cards. When you have too many purchases on credit every month, there is the likelihood that you will miss one or two payments. This will portray you in a bad light when it comes to borrowing.
Choose a Trustworthy Lender
Shopping around for the right lender may seem like a simple tip and practice everyone talks about. However, if you actually do research and scout lenders, their fees, their interest rates, and their availability can help you save money in the long run.
An excel sheet, or rather a comparison table will make things easy for you. Draw columns for lenders’ interest rates, fees, discounts, and any other valuable information and compare. This will help you make great refinancing decisions.
Choose the Right Interest Rate
There is a raging debate all over the lending world whether to go with a flat or fluctuating interest rate. Making a choice among the two depends on two factors; your personal financial circumstances and the market-based circumstances which you cannot control.
So, what can you do when refinancing a mortgage? The answer is simple; deal with circumstances that you can control, leave the rest. For example, if you feel that you cannot afford the fees that come with locking up interest rates, just go for fluctuating rates. Beware of the advantages and the disadvantages of both rates.
Know the Real Cost Of Refinancing
We all look at the interest rate and the principal amount to be repaid over time while applying for a loan. But we forget to anticipate closing costs yet it affects our money. Ask your lender for Attorneys’ fees, Title insurance, and search expenses, Application fee, Inspection fee, Appraisal fee, and Discount point’s way before you sign the mortgage.
This cost will range from 2% to 3% depending on your lender with the option of rolling over to your new mortgage. This will automatically increase your repayments. You might save more if you anticipate paying them from your pocket.
Arm Yourself with Required Financial Documents
By gathering all your financial documents, you have a higher chance of convincing your lender of your ability to repay the loan. You need to arm yourself with your bank statements, credit card history, current payslips, tax remittances, and other documents that verify your income.
Prepare Your Home for Valuation
Finally, another way of ensuring big savings when planning to finance your home is to prepare your home for appraisal. Low-cost updates will give your home a favorable value. First, make a perfect first impression by planting flowers, painting
The Bottom Line
By following the simple tips we have laid above, you can save both time and money refinancing. The mortgage expense might cost you an arm and a leg if you do not have a reason why you want to refinance. Your situation may be worsened if you do not choose the right lender, have a good credit history, or improve your home for appraisal.
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