Refinancing simply refers to replacing an existing loan with a new one so you can pay off your debt with the new loan. If you have a car or home loan that is too risky to deal with, you can resort to refinancing to find a better option.
A lot of things might have changed since the last time you went out to get a loan. Now, there are several options available for you to improve your loan’s terms.
While refinancing may sound exciting, the new loan should be one that has better features that will improve your finance than the last time. Here six ways to get the best refinance rates:
- Identify Errors In Your Credit Report
An error in a credit report might mean a misspelled name or incorrect balances. Although a lot of time, people take credit report errors lightly, this can have a huge impact on your next credit score.
The Federal Trade Commission once conducted a 2012 study according to which 25% of US consumers found errors in their credit report that could potentially result in them having a lower credit score in the future.
Aside from lowering one’s credit score, errors in your credit report can also impact your ability to open a new credit account or a loan.
Identifying and correcting your credit report errors may not directly help you get the best refinancing rates but it most certainly keeps you from getting a lower credit score than the last time.
- Make Sure That Your Credit Card Balance Is Below 25% Of Your Credit Limit
If you pay off your loans on time every month, you have a pretty good edge in getting refinancing options at better rates.
However, it is also imperative to keep your credit card balances lower than your actual credit limit. So, it would be a good idea to pay off your other balances so that the amount that you owe will be reduced and thus improve your debt-to-income ratio.
You should also avoid major purchases such as getting a car loan. When you use a small percentage of your credit limit, you can earn a better interest rate.
- Consider Getting A Loan With Shorter Terms
Expanding your loan term might mean you pay lower fees each month but in the long run, you end up paying for a much higher amount.
Getting a loan with a shorter term means that the monthly fees are higher but you save more money in the process.
Here are two short-term loan options that you should look into:
- 15-year loans
According to an MBA survey conducted by The Balance, a 15-year loan has 0.6 percent shorter interest compared to loans that take you 30 years to fulfill. When you combine shorter payment periods with a lower rate, this can result in higher interest savings in the long haul.
- Adjustable-rate mortgages (ARMs)
ARMs are basically home loans with varied rates which depends on the rise and fall of interest rates. They can help you get a home a lot faster but ARMs hold a lot of risks as well since interest rates can rise in the future.
A good advantage of using ARMs is that the bank will usually give you an initial rate for taking a risk on a loan that can have higher interest rates in the long run.
- Look Into Government Programs
If you have little equity or have problems with your credit history, government-backed loan programs can help you get approved a lot faster.
It is unlikely that you will get the lowest rates when you turn to government loan but the rates will still be a lot better compared to conventional loan institutions.
- Go For Out-Of-The-Pocket Closing Costs
People usually look for loans with little to no closing costs but these loans aren’t as perfect as they seem. If you can’t the number of years that you have to pay, you will end up paying a lot higher amount.
When you pay closing costs, you get to minimize your loan balance as well as your overall interest rate. You might have to lay out some money on the table the first time around but at least you can expect lower interest rates for the rest of your loan term.
- Perform A Comprehensive Search Of Banks And Credit Unions
It can be tempting to grab the first refinancing offer that you receive but various lenders have different refinancing options available.
You should instead meet a number of lenders and find out what they have to offer. Each lender’s refinancing options also have both advantages and disadvantages which you need to assess before coming to a final decision.
When you do meet with a lender, make sure to ask as many questions as you can. There are inquiries that cannot be answered with mere research. It would be best to consult with professional representatives for refinance tips.
Refinancing isn’t just for people who are having trouble paying off their current loan. It is also a popular choice for people who wants to save money as well as people who want to be done with their home loan payments. Just like many things, not all refinancing options were created equal. So you need to review each of your options carefully so you don’t miss out on a better opportunity to pay lower interest and pay off the loan faster.