Yahoo Finance My 5-step home loan refinance guide that saves $618 per month
Nicole's fast guide to refinancing could save you more than $7,000 per year.
If you do just one thing for your finances in 2024, please refinance. With the average home loan now $610,000, switching to the best interest rate around could save you $618 per month.
The best interest rate is around 5.69 per cent, while the average is far higher - around 7.31 per cent - and you could be paying even more. That dollar difference would amount to $7,416 this year.
Here are five simple steps to refinance your home loan.
Step 1: Suspend your spend
As part of a new loan application process, you’ll undergo the so-called Netflix test to ascertain what you spend and where. It’s forensic and far-reaching – with your permission, most lenders can ‘suck’ your banking transactions into a system that categorises where your every dollar goes.
The thing is, lenders will usually only look back three months – a time for which it’s manageable to get frugal with your money. So start now.
Step 2: Up your income
Of course, what lenders are really looking at is how much clear space there is between your income and your outgoings. The ‘fat in your finances’ will determine how much you can borrow.
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You will need to be able to cope not just with repayments at rates today but also if they rise another 100 basis points. Note this used to be 300 basis points but that hard-to-hit hurdle has mostly been removed so you are now more likely to get approved.
Here, extra income will naturally help. So, look to maximise it - if you are able - before you apply. Be aware too that earned income from employment carries more weight - self-employment will mean more income interrogation and may affect the amount you can borrow and even the interest rate. And don’t advertise it if your income may shortly drop - for example, if you're planning to get pregnant.
Step 3: Curb your credit
Not many people realise that your unused credit card limits will rule out a big chunk of the income you have available for home loan repayments. A lender will calculate how much it would cost a month to clear a maxed-out card within a three-year period. That could be a lot.
You may have to significantly reduce your limit/s, bearing in mind the same three-years-to-clear rule also applies to getting that limit back.
Step 4: Scour your credit score
The final ‘prep step’ to be ready to make a mortgage application is to check your credit score. You want it to be at least ‘good’. If it’s not, go through your credit report to see why. A mistake that makes you look bad can be fixed by approaching the institution first and the credit bureau if they don’t come to the party.
It will hurt you if you have missed any credit repayment by 14 days or more, or you are late paying a bill by 90 days.
Step 5: Apply
This is the easy part. It will usually be online with a lot of auto-filling, and giving lenders the account access they need is (almost disturbingly) straightforward.
You may be asked for letters assuring the lender of ongoing employment. Otherwise, most other necessary proof will be at your digital fingertips.
Once your loan is approved, a final tip: you will need to make sure you fill out a mortgage discharge form with your existing lender, so it can be paid out and your debt switched to the new cheaper institution on your refinance date.
At this stage, your existing lender may even offer you an interest rate discount in a bid to try to keep you. In any case, your monthly mortgage savings should take some serious stress out of your 2024 finances.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
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