Any news of a drop or a rise in the long term interest rates gets many homeowners thinking about whether refinancing their mortgage could be beneficial to them. Refinancing can be a wise strategy to save money on a long-term basis. It can also help a homeowner in curtailing the duration of his mortgage.
However, there are a lot of factors that one needs to keep in mind before joining the ‘refinancing bandwagon’. Refinancing without understanding your financial needs and the current state of your property could turn out to be a financial nightmare for you.
In the following points, we will take a look at some Refinancing Solutions which can be beneficial for those who are thinking about refinancing their mortgage.
1. Shop Around for the Best Deal
The first thing you should do is to check out the best deal in the market. If you have a handsome equity in your home, and your credit score is on the higher side, there is no reason why lenders won’t make a beeline to offer you some of the better deals. Ideally, you should be looking at getting a quote from at least five different vendors. If you have had no issues with your current financier, you can also have a look at what they have to offer to you.
Credit lending institutions understand the importance of keeping a customer; therefore, there is likelihood that you will get some competitive quotes from them. Apart from comparing the interest rates, you should also check about the reputation of the lender. There are a lot of hidden costs and fees that lenders usually avoid or conveniently ‘forget’ to discuss during their sales pitch.
Established lenders, who have a reputation for providing exceptional customer service, are often more transparent in their dealings. Therefore, you should carefully take a look at all these options before signing up with a lender to refinance your mortgage.
2. Look to Reduce Interest Rate Substantially
As we mentioned in the beginning of the article, any news about the drop in the interest rates sets homeowners in ‘refinancing mode’. An important thing that all homeowners should understand is that there are significant costs associated with closing your old mortgage and starting a new one.
Therefore, unless you are able to reduce your interest rate substantially, you should think twice before even considering refinancing.
For example, if you are paying a 9% interest rate on a 30-year mortgage, which has a fixed rate of interest, refinancing it to avail an 8.95% fixed-rate interest might not be in the best of your interests.
On the other hand, if the new loan is cutting down your interest rate by 1% or more, you should definitely give the offer a further thought.
3. Check Your Credit Score
Amidst the whole talk of refinancing, one of the important parameter that gets overlooked is the credit score. Lenders are laying added emphasis on the credit score of the applicant. Refinancing your home involves a lot of paperwork, and the last thing you would want is not being eligible due to a low credit score.
Ideally, a credit score of 700 or more will see you through, but if you credit score is hovering on the 650+ range, you might need to accept a relatively higher interest rate from the lender.
Many mortgage analysts are of the view that improving the credit score should be high on the priority list of those who want to refinance their mortgage. As interest rates fluctuate to a great extent, the ideal strategy is to get pre-approved for the loan, and lock the rates when they are at lower levels.
People who have average credit scores should try to pay their existing debt on credit cards as it will increase the percentage of available credit – something which scores brownie points with lenders.
4. Get Information about the Value of Your Home
People who are looking forward to refinance their mortgage should have an estimate about the value of their property. The reason this is important is because the value of numerous properties have plummeted over the years, and if you too find yourself in a similar situation, refinancing your home can be difficult unless you have the required equity. What it essentially means is that a lender may tell you to offer additional funds as for refinancing your mortgage.
Also, knowing about the property rates in your neighborhood will save you the $500, which you will otherwise have to pay to get the property appraised. If your equity in the home is less than 20%, you might also have to cough up some money for the private mortgage insurance (PMI). Therefore, it is pertinent that you are aware about the trends of the property prices in your area.
5. Refinance to a Mortgage of Shorter Term
One of the many ways you can make refinancing to work for you is by getting a 15-year or a 20-year mortgage. Although your monthly payments will be on the higher side, you will save a significant amount of money in the long-term.
If you feel that paying a high monthly payment on your mortgage will eat up a sizable portion of your earnings, try the option of ‘cash-in’, where you will have to prepay a portion of your total mortgage so that you don’t face the prospect of a very high monthly payment.
Refinancing to a shorter loan will help you in getting debt free at an earlier stage. For people who are in their mid-thirties or early forties, it can mean getting debt-free before they retire.
6. Check for Prepayment Penalties
Last, but not the least, it is extremely essential for a homeowner to check for possible penalties if he decides to refinance his mortgage. Although not all lenders charge customers for prepayment, some of them have certain terms and conditions regarding prepayment options. Therefore, it is important for homeowners to get information so that they are aware about all the pros and cons of refinancing their mortgage.
There are a lot of companies which help people with refinancing solutions. If you feel that you need further advice and guidance on your plan of refinancing, you can take the help of these companies. Although rates are still at low levels as far as Canada’s mortgage rates are concerned, homeowners shouldn’t make their decision in haste; instead they should weigh in all factors before making a decision about refinancing their mortgage.