Times are tough for a lot of people when it comes to your financial status, and every little bit helps. And sometimes it’s not necessarily about making more money (though that would be nice), but finding ways to use what you have to make your funds more accessible for your everyday life. And one way to do that is to refinance. But what does it even mean? After all, if you’re not totally experienced with managing money you’re not alone. Let’s keep it simple and assume you have minimal financial knowledge. According to Investopedia, refinancing is when “a business or person revises a payment schedule for repaying debt.” Perhaps you purchased something (a home, a car etc.) and you arranged a loan and payment plan to finance that purchase, but that was years ago, and interest rates as well as your financial needs have changed. You might want to think about refinancing your mortgage or your car so that you replace your existing payment plan with a new obligation to pay off your debt at a different schedule or different rate. Make sense?
Moving on…why would you want to consider refinancing? There are a lot of reasons, and with the current interest rates where they are (hint: they are low), it can certainly seem appealing. In fact, as per the Washington Post, the Federal Reserve just announced that it will keep key interest rates low in an effort to keep up with the global economy. So there’s never been a better time to consider refinancing. But where do you begin? And how do you know if you’re making the right decision to ensure a healthy financial future? Here are 6 tips to help you master the art of using what you got and getting the most out of your money.
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1. Think About your Goals First
Are you trying to lower your monthly payments? Free up more cash to use today? Shorten your loan term? Do you want more stability from a fixed-rate loan? Think about the big picture and what your specific financial goals are so that you can not only decide if refinancing is right for you, but also make sure you choose the best payment plan. And remember, your life can and will change a lot due to unexpected and even expected life events. Being able to properly plan for your current situation as well as prepare for your future will help you feel secure about your money and give you peace of mind.
2. Don’t Commit without Crunching the Numbers
Like most decisions in life, you should not make a snap decision without doing due diligence and researching the proposed refinancing plan. There is a reason that there are refinance calculators and financial experts there to help you. You can quickly crunch some numbers on a mortgage refinancing calculator tool to determine whether or not you will benefit from the revised loan. And if you’re still not sure, you can consult with a pro who might be able to help you make sense of the numbers.
3. Shop for the Best Rates
While rates in general are really low right now, you still need to shop for the best deal. You wouldn’t accept the first offer when buying a car or any other major investments, and the same rule applies to your mortgage or interest rate. Approach different lenders and banks, get quotes from a few different options and always ask for advice and referrals from family and trusted friends. As per Market Watch, even if the rate seems low, “the gap between the best and worst deals can be as much as a full percentage point,” according to HSH.com.
4. Get Familiar with Your Credit Score
The rates you are presented with will largely depend on your credit score, so get to know what that number is and work to keep your credit history as spotless as possible. If you want to ensure that receive the best possible rates then your credit score should ideally be at least 720.
5. Get Organized
When you apply for refinancing, you don’t just walk in with a friendly request and a smile. That might work when you get a free drink or an extra doughnut with your morning coffee, but when you’re applying to refinance your mortgage or your car, you’ll need a little bit more paperwork to get it done. Get organized and make sure you show up with all of the required documents and information to make the process as seamless as possible. Here’s a great reference to help you get started and assess what kinds of important information you will need (think W-2, pay stubs etc.)
6. Relationships Matter
Last but not least, know that relationships do matter. While it’s not exactly the same thing as calling a buddy and asking for a friendly favor, banks and lenders do take into account if you are a loyal, responsibly and good customer. Banks want to know that you can be trusted to make your payments on time and if they feel they are managing their risk then they’ll be more likely to be a little flexible with you.