Having a mortgage with a high interest rate can make paying back the loan difficult. Monthly mortgage payments can eat up a large chunk of your budget, but with costly interest charges being tacked on, paying back a 30-year loan may seem even longer.
You could have been stuck with a particularly high interest rate because you had less-than-desirable credit when you filled out your initial mortgage application. Your credit score could have been low because you may have missed credit card payments or are overspending. Getting out of this situation can be arduous, but if you would like to get your interest rate down, you should look into refinancing. This process involves transferring your current mortgage to another loan with a smaller interest rate that is generally at least 1 percent less than your current rate. But you can only get this new rate if your credit is in tip-top shape. Here are a few things you can do to get your credit in shape before you apply for refinancing:
Check your current state of finances
If you are thinking of applying for a refinance, first run a credit report and check out the state of your finances and credit score. If you notice on your credit report that your spending habits are out of control, you need to lock these expenses down by creating a budget. By tracking your expenses carefully each month and allocating a proper amount of your income to these financial commitments, you will be able to slowly work your way to an outstanding credit score.
While creating a budget for yourself, set up a payment schedule for your credit card and expenses. Missing credit card payments will not only result in late fees, but it will also negatively impact your credit score. If you have noticed you have a number of missed payments, try setting up reminders for yourself with phone calendar reminders or posting a note to your refrigerator.
Importance of a credit score
The point of a credit score is for lenders to see how responsible you are with debt. The lower your score, the less likely they are to entrust you with new loans. If you are currently embroiled with a plethora of debt, lenders may be cautious to let you refinance one of your current debts. One way they assess your current debt situation is by looking at your credit utilization rate. This is a percentage of how much credit you use compared to your limit of credit. For instance, if you have a credit limit of $5,000 on one account and have used $1,500 of that available credit, your rate would be 30 percent. In order to get that rate down, you should begin by paying off any debts you have. By slowly paying off your accounts, not only will you be getting yourself out of debt, you will also lower your utilization rate. A general rule of thumb is to get this percentage to lower than 30 percent.
Patience is key
Improving your credit score in order to meet the demands of a mortgage refinance will not happen overnight. It will take time to get your score back to a respectable figure, which may pay off in your favor. Rates tend to fluctuate depending on the market, so you may not get the rate you want right away. So while you are improving your credit score, track the market and see when mortgage rates are trending downward.