Refinancing a home is the idea of taking another mortgage to pay off the current mortgage. There are several reasons people can choose to refinance their home, such as getting loans with lower interest rates, favorable repayment terms, or if the owner wants to take advantage of increased home equity to make cash.
However, to get the best refinancing options for your home, you need to look at more than just getting a lower interest rate. Just like when you were first getting a mortgage to buy your dream home, you need to look at the different options available and settle for the best.
How To Refinance A Home
After you get your dream home, you think you can finally settle in it stress-free, but you’ll have a mortgage riddle that you still have to solve.
Some years into repaying the mortgage, if the idea of refinancing your home crosses your mind and you decide to try it out, here’s how you can do it:
- Know What You Want
Choosing to refinance your dream home shouldn’t be a rash decision just because refinancing offers better rates from the get-go. First, you need to know why you want to refinance your mortgage and what you stand to benefit from it.
Refinancing has the following end goals: reduced interest rates, reduced monthly repayments, and leveraging on equity to get cash to pay for other expenses.
Some of the benefits could conflict with each other such as when getting reduced monthly repayments, you can end up getting a higher interest rate and vice versa.
Therefore, you need to know what you want from undergoing refinancing first before pursuing the option.
- Improve Your Credit Score
Just like in financing your dream house, refinancing it will still depend on your credit score. A good credit score will increase your chances of getting a good mortgage deal. Here are some of the ways to increase your credit score:
- Correct any errors and your credit report as some credit cards could still be open in the report, yet you closed them.
- Pay any outstanding debts and bills on time.
Another way to ensure that you qualify for a higher refinancing is by increasing your net income. It’ll also reduce the debt-to-income ratio. By having a good credit score and a low debt-to-income ratio, you can comfortably refinance your mortgage.
- Compare Different Lenders
Lenders in refinancing act the same way as when giving you mortgage loans; they’ll offer different rates. The different interest rates will determine if you can save more money or not, and therefore, you must settle for the most favorable lender. The prospective lender should have better terms than the current lender.
Therefore, you should shop from different lenders, about three or five, then compare their terms. After comparing the lenders, you should settle for the best lender to refinance your dream home.
- Choose The Right Type Of Refinancing
Different refinancing options can be used by the borrower depending on the needs and the availability of the lender. As you look for a way to refinance your dream house, these are the types you can consider:
- Cash-In Refinancing- In this type of refinancing, you can pay down a percentage of the existing loan in exchange for a more favorable term such as low monthly repayments.
- Cash-Out Refinancing- If your home value increases on paper, you can get a higher loan by reducing your equity on the home. This allows you to get extra cash without selling your home. This will increase the total amount of loan that you’ll owe the current lender.
- Rate-And-Term Refinancing is the most common type of refinancing where the original loan is paid using a new loan with better terms and low-interest rates.
Sometimes, you’ll need to repay the remaining loan in its entirety, while sometimes, you’ll only need extra cash, so know what type suits you.
- Get An Estimate
After comparing rates and knowing what type of refinancing option you’ll work with, then you should get a loan estimate. Lenders will cross-check your credit score, equity, and other factors before giving you a loan estimate. You may also be required to first apply for a loan before getting your numbers run.
By getting a loan estimate, you can identify if it was the amount you’re targeting. You can then go ahead with the application or wait until you qualify for a better loan opportunity before choosing to refinance your dream home.
Refinancing your home is an excellent way to get extra cash or better loan terms than you currently have. But the process of getting the loan requires you to understand what you want and how much money you need before settling for a refinancing type and a lender. It’s highly advised that you always go for the option that suits you best.