Buying a house with a mortgage is an option for many homeowners, given the rising real estate prices and not being able to make such a large purchase in cash. But in comparison with, for example, personal loans, mortgages come with more favorable lending terms. That’s logical, considering that borrowers agree on these financial deals for ten or more years.
You can take out a mortgage with a variable or fixed interest rate. The latter is much more common and preferable, especially if you plan to stay in the house for a long time. It protects you from unfavorable conditions on the market because it enables predictable payments and easier budget planning.
The mortgage terms you agreed to might be favorable then. But now you might have a chance to refinance that loan. And you should do that only when you can feel the real benefits of it. A rule of thumb is to refinance when you can lower the interest rate by one or more percent or significantly shorten the repayment period with a slightly higher monthly payment.
If you’ve decided to refinance, you should find the most favorable offer that matches your financial plans and budget. Very often, you can negotiate better refi terms or, to be more precise, closing costs. See here what these are. And to get better refi terms, you can do certain things before that.
Work on Your Credit Profile
Your credit score is your financial ID. This data is of critical importance when looking for any loan because lenders evaluate your creditworthiness based on it. Some lending providers even have specific requirements regarding the minimum credit score you need to apply for a loan.
Since your credit score reflects your credit profile, you must build it carefully. If this parameter is average or below average, the chance for a favorable refi is almost non-existent. But if you work on your credit score before applying for a refinance loan, your chances increase significantly.
When you applied for a mortgage, your credit score may have been good. If you paid installments on time and had no delays with other payments, your credit score has probably improved significantly, which gives you an initial advantage in negotiations. However, if you still struggle with finances, try to fix it in the next couple of months, and then apply for a refi.
To begin, check the credit report and look for possible errors. Missed or outdated information can be a huge stumbling block, so you must report it to the credit bureau as soon as possible. If everything is in order, try to pay your obligations on time if you haven’t already. This action will be reflected in your credit score in a few months, but it can significantly improve it.
If possible, don’t incur new debts and keep your credit card utilization rate low. Also, it’s not good to apply for other loans, especially consumer loans, when you ask for refinance. Every application pulls a credit check, and several of them at the same time have a significant hard impact on your credit score.
Compare Lenders’ Offers
The mortgage market is quite busy, given the huge number of homeowners who take out these loans or look for the best options for refinancing. That’s why lenders do their best to attract clients by offering competitive rates and special perks. It’s up to you to find and grab them.
However, before you start your search, ask about the possibilities offered by the current lander. They may not offer you particular benefits, but if you have a healthy relationship with them and a strong credit profile, you can ask lenders for loyalty incentives. They may make concessions and even waive some of their fees to keep you as a customer, but that’s not mandatory.
If your current lender isn’t the best option, proceed to others. Look for reputable lending providers with good track records and many happy clients. Check their current rates and ask how willing they are to lower closing costs or offer a better interest rate than your current lender.
Consider No-Closing-Cost Refinance
Some lenders might even offer no-closing-cost refinance, which can initially bring you savings. That would mean you don’t have to pay the mortgage closing costs upfront, but you have to pay them one way or another. And to consider this option, you need to have enough equity and a solid credit profile.
Simply put, lenders may include these costs in the refi loan, which will increase the amount you borrow. They may even agree to waive these fees completely, but they’ll charge you a slightly higher interest rate. So, no-closing-cost refinancing pays off if you don’t have enough cash for upfront costs but can afford a slightly higher installment over the loan lifetime.
Negotiate Lender’s Fees
Once you build a strong credit profile, you can approach lenders with enough confidence to ask them to lower their fees. Before that, it is good to know which of these costs are negotiable and which are not. Flat fees, such as those for credit checks or appraisal costs, generally can’t be negotiated, because they usually don’t depend on the lender.
But, for example, you can try to cut the application fee. Some lenders charge it, while others don’t. By waiving it, you can certainly save several hundred dollars. Then, there’s the origination fee that ranges from 0.5 to 2% of the loan. If you convince the lender to lower it even by 0.25%, you can save a few thousand dollars.
Another thing on which you can save is insurance. Lenders can suggest their providers, but you don’t have to work with them. Instead, you’re free to shop around for cheaper policies, which can also save you a few hundred dollars.
If you have a chance to refinance the loan, you should do it under favorable conditions. So be a reliable borrower and put yourself in a good negotiating position. It can bring you significant savings and costs you nothing to try.