When you refinance your home, you’re essentially replacing your current mortgage with a new one that is in theory easier to pay off. This could be because you’re paying under different terms, maybe you have longer to pay it off or you managed to acquire a lower interest rate. Obtaining a refinance isn’t that difficult either, you essentially reapply for a loan much like you did the first time around, and when doing this there are some things you should keep in mind: When you refinance your home, you are looking for the lowest interest rate possible. The goal is to maximize your savings, making the refinance process worthwhile. You can use several strategies, like the ones below, to get the most significant benefit out of a refinance.
Improve Your Credit Score
Improving your credit score is the biggest factor in getting the most out of a refinance. A difference of one point from 679 to 680 is enough to reduce your mortgage fee by one point. That is the equivalent of $1,000 for every $100,000 you borrow.
Optimizing your credit score could be as simple as fixing any errors you might find in your credit score, which involves disputing whatever purchases or deductions to your score you believe to be a mistake. You could see your credit raised by 100 points in less than one week. Higher interest rates mean higher monthly payments, which could cost you thousands of dollars over the long term. It is in your best interests to evaluate what credit errors you have and make plans to fix them quickly.
There’s also the fear that refinancing itself could hurt your credit, but unlike simply taking out another loan, you’re replacing an existing loan with a new one. As a result, the damage this could do to your credit is very minimal.
Unfortunately, many homeowners request mortgage quotes from just one lender. However, it takes some serious research and comparison shopping to find the right mortgage lender that can help you reduce what you’re currently paying and what you owe. You have to get out there and start googling and making calls to find which lender is likely to give you the best deal possible, and it gives you a chance to weed out the sketchier lenders that might not only not give you a better deal, but potentially make your current situation worse.
If you get a loan that is $300,000, your savings could amount to over $14,000 over ten years. That is why you may want to talk to your local bank or credit union, like the Credit Union of Denver, and compare rates from other mortgage lenders before deciding on the one you will get a loan from.
Use Equity Carefully
Many homeowners are equity-rich. They have at least 50 percent home equity. They can tap into that money using a cash-out refinance to cover financial goals. However, it is best to be cautious when using equity to cover short-term expenses.
For example, it may not be worth it to take a 30-year mortgage loan to get money to purchase a car with a five-year life. You will be paying back the mortgage decades after the car you buy stops working.
A mortgage is also an expensive way to cover a vacation. Some will use equity to cover high-interest credit cards. You will have monthly interest savings, but you will still be paying back your debt for decades. If you want to refinance with a shorter term, consider a home equity line of credit (HELOC) instead of a cash-out refinance.
You want to be sure that the refinance benefits you. Know your end goal. Use refinancing to make that goal a reality.