Becoming a homeowner is one of the biggest privileges of being an adult. You are able to live in your own space, pay your own way and decorate it however you want to. Being a homeowner is also a learning curve for many young adults, and the main thing we learn about is the sheer cost of a mortgage and other home costs.
If you have taken out a mortgage for your home, you will have chosen either a fixed rate or tracker rate to pay alongside your mortgage each month. Sometimes through, this deal doesn’t work for you, and for whatever reason you may start to struggle paying off the monthly payments on time. If you start to struggle paying back your mortgage, you can look into home loan refinancing. The idea of refinancing your home is the idea of wiping a clean slate with your payments and being able to pay your mortgage with smaller monthly payments. If you want to think about remortgaging this year, here are some things you need to consider first.
Home Equity
Before you think about refinancing your home you will first need to make sure that you have equity in your home. One of the main issues we are facing at the moment is the drop in the housing market which is causing many homeowners to owe their lender more than the value of their home. If you try to refinance a home without any equity to your name, you will struggle to get a deal that works for you and your family. Although there are some government plans which back this and will enable you to do so, it is not the advisable way to go. The best way to find out if you would qualified for refinancing your home is to talk to your mortgage advisor and see what they can offer you. If you simply cannot do it, you can still talk about changing your monthly payments to make them more manageable.
Credit Score
Credit score is one of those financial measures which you will never be able to fully escape from, no matter the situation. It could be that you want to take out a new phone contract, by a car or mortgage your home: lenders will always look at your credit score before making a decision. Your credit score tells the lender how trustworthy you are. It allows them to see how likely you are to be able to pay back your loan on time every month and stay on track with your payments. If you currently have a low credit score due to some loans or debts in the past, you need to address the issue now. You can increase your credit score by paying off existing debts, taking out a low credit score credit card to prove you can pay off the debt, and simply being more careful with your money. Once you have managed to increase your credit score by a small amount you will be able to apply for refinancing your home.
Debt:Income Ratio
Most of the time, it is fair to assume that if you already have a mortgage, it should be a breeze to take out another one. However, since the time when you took your mortgage out, the bar has been raised higher and the qualification for a mortgage is much more difficult than before. For example, the credit score limit has risen massively, so if you have existing debt you will struggle to qualify until you pay it off. Your debt:income ratio therefore may affect your ability to open a new mortgage because if you have a ratio of more than 31%, it is deemed too much. If you are in debt or have money issues, make sure to take the time to sort these out before you try and apply for a new mortgage.
Refinancing Fees
We all know that everything comes with a price. If you are looking to remortgage your home this year, you are going to need to think about the fees which you’ll need to pay for the deal to be done, most of the time, your fee for refinancing your home will be between 3-5% of the loan. However, if you don’t have this money to hand you can find ways to add this into the loan and enable you to go ahead with the deal. If you do go for a no cost refinancing, you will have to pay a higher interest fee each month to cover the difference and this can mean for a more difficult repayment. Make sure you take the time to shop around, and remember that you don’t have to take out our new mortgage with the same people who held your old one.
Rates
For most people, the main aim when remortgaging a home is to reduce the methyl payments and make them more manageable for us. It is important to remember that your term will affect the overall rate you end up paying during the term. If you want to pay less interest throughout your mortgage term, you will want to go for the lowest interest rate you can: but the term you decide to take will affect the amount you need to pay. To save the most money, you will want to take on the shortest term so that you pay less interest overall. However if you are struggling with the monthly payments you may need to extend this.
Breakeven Point
It is important to think about whether or not you will reach your break even point on your second mortgage before you move out of the house, with the deed you pay to take out a new mortgage, you need to think about The point at which you have recouped these costs and you will start paying the mortgage as normal. If it takes you a year or two to breakeven, and you plan to move on not long after that, there is no point in changing your deal at all.
Private Mortgage Insurance (PMI)
If you don’t have a lot of equity on your home by time you decided to refinance the home, you will have to pay something known as PMI. Private mortgage insurance is something which you may already pay on your current home, bit if you don’t due to the value of your home, you will need to prepare yourself for it. The issue you need to be aware of here is that if your ultimate goal is to pay less every month and have more money to live your life, this might not happen once the PMI is added on. PMI is a cost that many don’t think about, and it can end up costing you just as much as your current payments, if not more.
Tax
When you refinance a home you will see that your tax will either increase or decrease. Of course, everyone loves the idea of paying less tax, and if this is going to be the case for your new deal, then go ahead. However, sometimes it doesn’t work like this. Tax can increase sometimes when you take out a new mortgage and it can impact the amount of interest you end up paying.
Remortgaging or refinancing your home can be a brilliant way to save money and make your monthly payments more manageable, however always make sure that you do your research, prepare yourself and think about every Into in before you dive right in.
