Borrowing money is a good way to achieve a goal and afford something when you don’t have enough cash. In the case of property ownership, most people get it through mortgages. These long-term loans have relatively favorable lending terms, considering they are secured by the property you bought with borrowed money.
Also, most mortgages have fixed interest rates, which make installments predictable and the entire financial arrangement less risky. However, this doesn’t mean that home loans are risk-free. You can find more details on mortgage pros and cons at this link.
At some point, the current installments can weigh you down. Maybe your financial situation has worsened, and you want to pay smaller installments. Or things have got better, so now you have more money and want to get rid of the debt as soon as possible.
Refinancing means replacing one mortgage with another, which entails certain costs. They refer to the mortgage closing, new loan interest, and fees. These can differ a lot, so there’s a very diverse offer of refi options on the market and finding the most favorable one mostly depends on you.
Understand Refinancing Costs
Besides interest rates, which make up the largest part of any loan cost, other expenses related to settling the initial mortgage are also essential when refinancing. It’s good to get to know them so that you can understand the profitability of refinancing.
These costs generally include fees that can vary from lender to lender. In general, these are origination, appraisal, and survey fees. The latter may not be necessary if you have a document on the clear boundaries of your property. Then, lenders will charge you credit check costs and certain fees, which mostly depend on the location and state in which you live.
The good thing is that you can negotiate most of them. These are costs you’ll pay in advance or roll into your new loan. For those fees that are non-negotiable, knowing them helps you compare different loan terms and find the cheapest refi option.
A particular thing to pay attention to when refinancing is discount points. They are a way to get a more favorable interest rate on a new loan by prepaying part of the interest. One point lowers the APR on the new loan by 0.25%, and you can buy as much as you can afford. This fee will be added to the total mortgage closing cost, but you don’t always have to use this option.
Know Your Goals
Mortgages are long-term loans with a repayment period of ten to 30 years, usually depending on the amount you borrow. The real estate price and your budget determine how much that will be. In short, you need a mortgage with monthly installments you can afford.
Deciding on refinancing is not easy, especially if you have several options available. So the initial step is to know your goals and how you can best fit them into your capabilities and current financial situation. Of course, it’s always desirable to think long-term.
Situation one: you pay a fixed monthly installment on a 30-year mortgage, but for some reason, your monthly income decreases, and this obligation has become a burden on your budget. You could use installment decrease, so you’d need a new loan that carries a lower interest rate. If you manage to get it, this loan will be initially cheaper, but it extends the mortgage repayment period, making the entire arrangement costlier.
Situation two: you have a chance to get better lending terms because your financial situation and credit score have improved. If you’re lucky, you can get a refi loan with the same or even lower interest rate but with a shorter repayment period. That way, you can get rid of this debt faster and save significantly over the loan lifetime.
Shop Around
When you know your goals, you’ll know what to look for. Of course, you should never immediately decide on the first offer that seems fair. Instead, you should get quotes from several lenders, and compare their offers and lending terms. That way, you can find the most favorable refinance loan.
Your goal is to lock in the new loan with the lowest interest rate. Finding these offers isn’t impossible because most lenders advertise their most affordable loans. But that’s the trick – it’s not an interest rate you can count on for sure. It’ll depend on your credit score, income, and a few other factors that present you as a more or less reliable borrower.
Also, the lowest interest rates usually include discount points, which can sometimes mean favorable refinancing, and sometimes not. In principle, it will depend on how long you need to reach the break-even point, as well as how long you plan to live in the house you bought with a mortgage.
The down payment plays a significant role when you look for billig refi options. The more you pay for the house you plan to buy, the less you’ll need to borrow. And the less you borrow, the fewer costs you’ll have. Plus, if you’re a worthwhile borrower, you can ask for even better lending terms.
Choose Right Refinancing Loan
Just as there are different types of loans, lenders also offer different options for refinancing. Each comes with its pros and cons, but if you look for the most affordable options, you must know which costs each refi type includes. That way, you can narrow your choice to the refi loan that suits you best.
Rate-and-Term Refi
A traditional rate-and-term arrangement is when you use another loan to repay the initial mortgage in full under more favorable conditions. It usually includes lower monthly payments, shorter repayment terms, or both. And if you’re a borrower with a good credit profile, you can lurk for both perks.
The rate-and-term refi is the most common form of refinancing, although it may have the strictest eligibility criteria. Lenders require borrowers to have a good credit score, low DTI, and a certain percentage of equity to grant this refinancing loan. If you’re not eligible for it, you can try to borrow against your equity.
Cash-Out Refi
If you have enough equity, you can opt for a cash-out refinance. It means you borrow against the portion of your property you’ve already paid off. These are also secured loans, meaning you can get a low interest and good lending terms as you put your property as collateral.
Plus, if you choose a good moment, your equity may be worth more than the remaining debt. So when you tap it in, you can refinance your mortgage and get extra cash for whatever you want. Depending on how much you left, you can renovate your home, travel, buy a car, or even start a business.
Cash-In Refi
For a cash-out loan, lenders generally require more than 20% equity. If that’s not the case, you can opt for another type of refi where this requirement is not strict. It’s cash-in refinancing, when you’re required to put money towards your loan principal and thus increase equity, that is, reduce the LTV ratio (loan-to-value).
You will do this when you have an option for a favorable refinancing with a lower interest rate than the current mortgage. Of course, cash-in refi makes sense when you have extra cash to pay towards the principal of your new loan. That could save you a lot of money down the road.
Improve Your Credit Score
Lenders who offer competitive interest rates on their loans are generally willing to negotiate. Their goal is to attract and retain clients with an excellent credit history, and low-interest rates are certainly a good way to do that. So if your credit score isn’t stellar, you better improve it because it’s a sure way to get better refinancing conditions.
Building an excellent credit score is not hard, but it takes attention and time. Start by checking your credit report and correcting any errors. Try to be regular with paying your bills and use your credit card responsibly. Finally, take care whether lenders’ credit checks are hard or soft inquiries because this can further lower your credit score.
Refinancing has a point when you can benefit from global APR falling. Whether you want to get rid of debt sooner or save on monthly installments, you have to look for a refi option that suits your needs, plans, and capabilities.