The first step in refinancing a home is to get all your outstanding bills paid up to date. This will maximize your credit score, which is vital when searching for any kind of financing, including a refinance loan for a home. The higher you can get your credit score before approaching lenders, the lower the interest rate they're likely to offer, and the more money a refinance could save you in the long run. If you have any outstanding bills that you have been putting off because your credit score was not an issue, paying those off will significantly help your credit score.
After you have spent some time maximizing your credit score, it's time to approach a lender. Make sure you have all the necessary financial information before going to a lender, and remember, you have the right to talk with multiple lenders to compare interest rates. Experts recommend speaking to at least four separate lenders before accepting a deal. Above all, the repetition allows you to educate yourself to the process and lenders' strategies, giving you knowledge to negotiate and helping you to avoid signing a bad contract.
It's very important during these times to educate yourself. Customers who seek financing with little or no knowledge of the process, current interest rate averages, etc. leave themselves open to lenders who unscrupulously charge a higher interest rates to ignorant borrowers, which could easily cause financial disaster down the road. Make sure you have a full understanding of the interest rate being offered and compare that to the average rates being charged at that time. Also make sure to get a full understanding of the closing costs involved before signing.
Closing costs and your per month savings after a refinance are two important factors to consider when considering a refinance as they are used to help you determine your break even point. For example, if a refinance costs $5000 in closing costs, and saves you $500 per month in mortgage payments, it would represent a ten month break even point. But if a refinance cost $3000 in closing costs but only saves you $30 per month, the break even point would be 100 months, meaning it would be more than 8 years before the refinance actually saved you money.
So the decision to refinance is one that should never be taken lightly. The break even point, monthly savings, and sacrifices necessary to clean up credit are all factors that should be closely weighed before agreeing to a refinance. But with sufficient research, preparation, and some patience, the process can save most homebuyers a significant amount of money in the long-term, especially with interest rates still near record-lows.
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