If you purchased a home when your credit was not the greatest, you might not have the best terms on your home loan. The good news about this is that you do not have to keep the same mortgage forever. You can refinance it to acquire better rates. After getting your initial mortgage, you can instantly start preparing for your refinance, even if you will not go through with it for a few years. Here are the best ways to prepare for refinancing your home.
Work on Your Credit Score
Your credit score affects your loan eligibility and the terms you receive on your loan. If you qualified for a loan when you had bad credit, the lender probably charged you a higher interest rate on the mortgage. If this is the case, you might qualify for a lower rate if you can prove you are creditworthy when you apply for a refinance loan. The only way to do this is by working on your credit. Here are a few practical tips to help you improve your score before you refinance:
- Dispute negative things that do not belong on your report.
- Pay off debts to lower your credit utilization rate.
- Take an installment loan to build your payment history.
- Pay every bill on time and avoid collection accounts.
These are just some of the things you can do to build your credit. Any positive steps you take can cause your score to increase. When you refinance with a higher score, you will receive a lower interest rate.
Work on Improving Your House
The second thing you can do is work on your home. Homes typically appreciate in value over time. They also appreciate in value from the work homeowners put into them. If you can put the right work into your home, it could help you increase the home's value.
The benefit of this is that you might end up with improved loan terms if your house value is worth more. When you purchased the home, you might have borrowed 90% of the home's value. If you now owe less and have a more valuable house, refinancing might allow you to borrow just 70% of your home's value. If you borrow less, you might be able to avoid paying mortgage insurance and other fees on your loan.
If you have questions about refinancing, talk to a lender today. A lender can help you prepare for the home refinancing process and understand it.