Refinancing or mortgage refinancing has become pretty common in terms of an investment property loan. Although it can help in some ways, if you cannot go for an affordable mortgage and save money, it won’t make any sense. Also, as it is a loan like many other loans, it will have its own mortgage rates and mortgage terms. Hence comes the question of how to get the best refinance rate. Usually, what we are looking for in the best refinance rate is the lowest rate. Here are some of the ways that can get you the best refinance rate.
Lowering the Debt-to-Income Ratio
The debt-to-income ratio refers to the portion of one’s total monthly income, which they spend for debt repayment. The lower the rate, the less debt you have, exerting better possibilities to get a good mortgage rate. Similarly, the higher the rate, the more debt you are into, triggering a higher mortgage rate when refinancing. Why does the mortgage rate go higher in this case? Well, borrowers with a large load of debt are considered riskier applicants. Hence, the mortgage rate gets higher.
Now, to improve your debt-to-income ratio, you can pay off your small debts, like installment loans, personal loans, student loans, etc. If that is not possible either, you can at least try to resist your credit card debt. The ideal limit of credit card debts is 30%. That means your credit card debts should not exceed 30% of the total credit line. Some experts recommend 25% instead of 30%. We would say the safer side you can be on, the better.
Resist the Temptation for a Cash-Out Refinance
This is another term for cashing out your equity. If you own a considerable amount of equity, it may tempt you to turn it into cash. When you turn your equity into cash by a cash-out refinance, you can use it for any purpose, which may include unnecessary expenses like vacations. Yes, a cash-out refinance can help you in debt consolidation, paying off college tuition, improving your rentals, etc. As you can borrow up to near 100% of your property’s value to do this wide range of paying off, it may seem very appealing. But that should not lead you to lose your equity.
Although you get some advantages like warehouse improvements, this loan type actually increases the mortgage balance. And as you must repay the amount you borrowed from your equity in terms of cash, it will increase your debt-to-income ratio. As a result, there is a potential possibility for a higher mortgage rate. To avoid this higher rate, don’t turn your equity into cash unless it is a must. And if you do so, make sure that you cash out only the necessary amount, no more than that. But also keep an eye out for the opportunity where you may borrow some cash from your equity at a lower rate.
Shorter Loan Term
Choosing a shorter period for your debt repayment may be one of the most successful ways of securing the best refinance rate. Paying a little amount each month for a long time may seem quite appealing, but in the end, you will find yourself paying quite an extra amount due to the interest rates. Hence, if you can afford to pay a little more each month, you should leave this opportunity unattended.
This way, your debt repayment will be complete within a shorter period, and ultimately, you will have to pay less compared to that of the longer period. Yes, you will have to pay a little extra each month in the case of short term. Nevertheless, you will be paying less interest over the period of the mortgage. Also, your loan will be paid off sooner, opening new possibilities of building equity faster.
Maintaining a Good Credit Score
Refinance requires all the same as that of the previous commercial property loan. Your income, debt, credit, assets, everything will be scrutinized to allow you for a refinance. If your credit score is not up to the mark or has lowered since your previous loan, you may not qualify for a refinance at all. And even if you do qualify, the possibility of a higher interest rate is high. Hence, pay your bills on time, including bills for your utilities, installment payments, credit card bills, etc. Payment history takes 35% of a credit score. Therefore, good payment history will lead you to the best refinance rate.
Follow some basic rules- maintain a good credit score, choose a shorter loan term, lower debt-to-income ratio, and you will get the best refinance rate.