Refinancing is a great way to lower the interest rate on your home, find a lower monthly payment, or even get access to a little extra cash for things like home improvement or upgrades. However, the process isn’t all that simple, and you’ll need to know a few things before you start your search for new mortgage.

No-Cost Refinancing Is Usually Not a Thing

You’ll encounter ads that promise that you can refinance your home for “no cost”. Understand that while no-cost loans do exist, they’re very rare. There are almost always costs. The only real question is where those costs are factored into the loan. For instance, if the refinance loan you’re considering promises no closing costs, that means they’re tacked on to the back end – they’re still there, even though you might not have to pay them upfront.

Be Prepared for the Paperwork Requirements

Once upon a time, refinancing was a pretty simple process. It’s not that way today. In fact, the refinancing process is much closer to what you experienced when you originally bought that home. You’ll have quite a bit of paperwork needed by the lender to refinance your home, so it’s important that you prepare for this. Some homeowners have reported waiting for months to get their homes refinanced, simply because their lender kept demanding more documents.

Watch Your Credit

Think that refinancing a home will be less centered on your credit than your original home loan was? Think again. Lenders are still focused on your credit score and your credit history. It’s vital that you keep your credit score up, and that you avoid unnecessary hits to your credit in the months leading up to refinancing. That means not applying for additional credit cards, not taking out auto loans, and staying current on your bills. If your debt to income ratio is high, pay down some of that debt before you even think about refinancing.

Think Carefully About Keeping Cash

Thinking about refinancing your home and keeping a portion of the money for other uses? It can be a low-cost form of lending, but it can also lead to other problems. Remember that any cash you keep out of the loan just means that you now have less equity built up, and you also have a larger overall mortgage, which means you’ll be paying on it even longer. It may be a smart decision depending on what you intend to do with that cash, such as paying off high-interest credit cards, but it might not be the right move for you.

Carefully Consider the Length

When you refinance your home, there’s no rule that says you need to get a loan of the same length. For instance, you might consider a 30-year fixed rate loan because that’s the most common, but you might benefit from a 15-year loan. There are other options, too, including 20-year loans, 10-year loans and 40-year mortgages. Carefully consider the length of the loan, the interest, and how well each lending option will fit your needs both today and tomorrow.

No Prepayment Penalties

Whatever loan you choose, make sure there are no prepayment penalties. You can save a great deal of money over the life of the loan by paying more than the minimum each month, but some loans penalize you for doing this, and it will actually increase your overall costs. Make sure that the loan you choose doesn’t have any prepayment strings attached.

Follow these tips, and you’ll find it easier to refinance your home, and ensure that you’re getting the best interest rate, and the best overall lending package for your needs.

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