If you took out a mortgage a few years ago, you’ve probably built a good portion of equity by now. Bearing in mind that real estate prices in that period were significantly lower than today, your property is probably worth a lot.
This information is of great benefit to those considering refinancing. Let’s be honest, few people will pay off the mortgage under the initial lending conditions. If you do the math, a seemingly favorable long-term loan with fixed interest and affordable monthly installments can end up costing you a lot.
Refinancing can help you cut those costs. You have the option to replace the original mortgage with another one under certain conditions, and you can do it whenever you want. Some types of refi loans require a waiting period, but apart from that, there are no other obstacles regarding timing.
You can refinance your mortgage already after six months of repayment, provided you have a more favorable option and meet the lending criteria. So if you plan to do that, you should do these few things to ensure billig refinancing and actually experience the benefits of refinancing.
Why You Want to Refinance
A favorable refi loan can bring you savings on monthly installments and the entire debt. Experts agree that you should replace one loan with another if the latter carries a lower interest rate by even 1%. So if interest rates are going down, you should take advantage of the favorable moment and, if possible, lock that rate or arrange a new fixed mortgage with that rate.
There are also situations when homeowners refinance the initial mortgage even if it comes with a higher interest rate but a significantly shorter repayment period. A slightly higher installment allows you to get rid of the debt several years earlier. Plus, during the loan lifetime, you will pay less interest, making this arrangement much cheaper than the initial one.
Another good reason for refinancing is removing or adding a co-borrower. Having a co-borrower is mostly used by those who have struggled to get a loan or wanted better lending terms. For instance, some married couples do that, as two incomes and good credit scores are a sure path toward a cheap mortgage. However, in case of divorce, the mortgage holder usually decides to remove a co-borrower by taking out a new refi loan alone.
On the other hand, refinancing by adding a co-borrower is done when you can add someone to share mortgage rights and obligations. This way, you can secure more favorable lending conditions, even if you’re not an ideal borrower.
If you are wondering what is refinancing, read this article.
Assess Your Equity
As said, equity is a part of your property that has already been paid off with the initial mortgage and is completely in your ownership. You can use it to get a refinance loan, and the higher the equity (estimated at a higher value), the more money or more favorable lending terms.
Lenders require a certain percentage of equity, which can be as low as 5%. But you can expect extra refi costs and less favorable lending conditions. However, if your equity is 20% or more, you can qualify for a cheap refi. Lenders consider higher equity to be a lower risk of loan default.
In order to calculate how much your equity is and how much you can borrow, it’s a good idea to hire an appraiser to estimate the current value of your real estate. Subtract the rest of the mortgage debt from that amount, and there you have your equity. In some cases, it can be higher than the entire mortgage, which allows you to apply for a cash-out loan and thus refinance the mortgage and get some extra cash.
Check Your Credit Score
This step is a must before applying for any loan because it will show your chances for favorable refinancing. The better your credit score, the more eager lenders are to offer you better lending terms.
If your credit score is low due to previous financial mishaps, you can still apply for refinancing. However, it’s always better to put extra effort into fixing this parameter and ensure better refi conditions. It’ll take some time for your actions to show results, but it’s worth it.
Be sure to look for errors and outdated data in your credit report. Cut your debt and try to boost your earnings. However, the most important thing is to build good payment history by regularly paying installments on current loans, card balances, and other obligations you have.
Do the Math
Once you assess your borrowing abilities, you can look for refi loans. It’s always good to check the offers of several lenders and compare the refinance costs. What you need to know are the mortgage closing costs and the savings you would potentially achieve with a new loan because you need that to calculate the break-even point.
Closing costs include the costs of the new loan and possible penalties you’ll pay for closing the mortgage. In most cases, they are one to six percent of your loan. The savings you get by refinancing should cover these costs for a certain period. Of course, the shorter this period, the more benefits refinancing brings.
Be wary of no-closing refi costs loans (check its pros and cons here). Taking them doesn’t mean you won’t pay closing costs, but they’ll be included in the new loan. That can increase its costs because you’ll pay a little higher interest. Still, that’s a viable option if you can’t pay these expenses before the refinancing.
An essential item for this calculation is your plans for the future, like whether you will stay in the house or sell it. For instance, if the break-even point happens in the fourth year of refinancing, and you don’t plan to sell your home any time soon, you can enjoy refi benefits. In that case, the new installment brings actual savings.
Prepare Documents and Apply
After you’ve found a favorable refi loan, the last step before applying is to prepare the documentation. What documents you need depends on many factors, such as the type of employment, whether you have a co-borrower and the refi loan type. That can be a hassle, so you might want to hire an attorney to help you with this.
Taking out a refi loan at the right moment can be an excellent move. It can save you a lot of money and help you get your finances in order. To enjoy the most benefits, you should research your options, be well-informed, and pick the best deal to suit your needs and financial capability.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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