Most people renew their mortgage once every three to five years. For many, the experience can be a stressful one. It’s fraught with negotiations, bartering, budgeting, and number crunching. While the end goal of every homeowner is to get the best possible deal, it’s often easier said than done.
Bank representatives can be shrewd negotiators. The entire mortgage renewal process leaves many homeowners feeling vulnerable and fleeced. As always, the best approach is to arm yourself with knowledge. Here are some tips and information to help you successfully renew your mortgage.
Start The Process Early
Time can work in your favor, if you start the mortgage renewal process early. By early, we mean at least six months before your current mortgage is set to expire. If you leave the renewal to the last minute, your only option will likely be to accept the terms offered by your current bank. You can bet that those terms favor the bank, not you.
By starting the renewal process early, you give yourself time to shop around. You can see what interest rates are being offered by different lenders. Use that information to negotiate with your bank. Equally important, you will not feel nearly as stressed or pressured for time.
Interest rates often change quickly. Starting early will give yourself time to see the direction in which rates are moving – whether up or down. The bottom line is that you can’t go wrong by giving yourself time to renew a mortgage. It will make the entire process much easier on you.
Know Your Credit Score
Banks will tell you that the interest rates they charge are partially based on your credit score. The better your credit score, the better the interest rate you receive. For this reason, it’s important for you to know your credit score. Really, you should know more than just your credit score. Be aware of exactly what is on your credit report before you walk into a bank to renew your mortgage.
Sadly, most people have no idea about their credit score or report. According to the companies that keep our credit reports, only about 40% of people ever bother to check them. This is especially sad given that it’s free to check your credit score once a year. You can obtain your credit score and a full credit report from these three institutions – Equifax, Experian or TransUnion. Knowing your personal credit situation will arm you with critically important information when you sit down to negotiate a better interest rate on your mortgage renewal.
Pay Off Existing Loans and Put Off Any New Loans
If you have an existing loan, such as a line of credit, a car loan, or even credit card balances, you should try and pay those off before renewing your mortgage. Similarly, if you anticipate needing a loan in the near future, you should wait if possible. Put off applying for any new credit after your mortgage renewal is settled.
A mortgage is also considered debt by the bank. It gets rolled in with any other debts you happen to have, such as a line of credit or car loan. The bank can use your total debt load against you when negotiating your mortgage renewal. That may push you to a higher interest rate and less favorable terms.
The less debt you have going into a mortgage renewal, the better. You’ll have a stronger hand to negotiate. You should come out with a lower interest rate and terms that work best for you and your family. Loans that are paid in full also help to boost your credit score.
Consider Closing Some Debts
Generally, it’s a bad thing for your credit score to close unused credit products. For example, maybe you have a credit card or a line of credit that you keep for emergencies, but never carry a balance. That’s a good thing, because it boosts your available credit and gives you a solid utilization score. That is, you have available credit that you don’t actively use.
However, banks can also view it as a negative. When considering your mortgage, they may look at what your finances would be like if you had max out all your available credit cards or lines of credit. With the minimum payments and interest fees tacked on, suddenly your regular mortgage payment is at risk.
Don’t close all of your credit accounts, of course. But if you have multiple credit cards (especially store branded ones), consider closing them. If you can, close them at least six months before your mortgage is up for renewal. That way, if your credit score takes a tiny ding, it has plenty of time to bounce back.
Never Accept The First Offer
Studies have found that, when it comes to renewing a mortgage, it pays to shop around. Really scout out your options. Yet, an Angus Reid survey found that 27% of households automatically renew their mortgage with their current lender when the term is up. They don’t even bother to try and find a better deal. Not smart.
As a general rule, you should never sign the “renewal letter” the bank sends you before your current mortgage expires. Banks rarely give their best offer in the renewal letter. They are more likely to provide truly favorable terms to those who have shopped around. In fact, bring them a better offer from a competing lender and challenge them to beat it.
You should only consider the renewal letter as the first offer in negotiations. But by no means should you blindly accept the terms put forward by a bank. It would make things far too easy for the bank and put yourself in a disadvantaged situation.
Be Flexible With The Terms
The more flexible you are willing to be with the terms of your mortgage, the better off you’ll be in the long run. For example, does your next mortgage need to be for five years? What if you could get a better rate for a two- or three-year mortgage? Similarly, do you have your heart set on a variable rate mortgage that is subject to fluctuating? Or could you live with a fixed rate mortgage if it happens to be lower than the current variable rate?
These are the kinds of questions you will need to confront when renewing your mortgage. Again, how flexible you are willing to be will ultimately determine how good a deal you get at renewal time. In the end, you should be focused on getting the lowest interest rate possible, for as long as possible. If that means you have to renew your mortgage again in a year or two, so be it. Look at the best deal possible and don’t box yourself into a corner.
Play The Banks Off Of Each Other
It only pays to shop around if you play the banks off one another in your negotiations. Get a mortgage offer and interest rate from a competing lender. Then ask your bank to beat it. Then take your bank’s new offer back to the first lender you met with and ask them to do better still. Better yet, involve three or four different potential lenders. Going back-and-forth like this is the best way to get yourself advantageous terms when your mortgage comes up for renewal.
Remember, there is no loyalty when it comes to business. Your bank would dump your business in a heartbeat if you stopped being profitable. Be prepared to walk away if you don’t get the deal you want from your bank. It’s the best leverage you have in terms of negotiating with any lender.
If your bank tells you that they don’t negotiate, walk away right there and then. Don’t waste your own time. If the bank wants to keep your business, they will negotiate. However, the real key is for you to have a counteroffer in hand to slide across the bank manager’s desk.
Maintain or Increase Your Payments
Even if the term and interest rate on your mortgage changes, that doesn’t mean that your weekly, biweekly or monthly payments should change. In fact, maintaining your current payments with a lower interest rate, or even increasing those payments, is the best option. More money will go towards the principle, which will enable you to pay off your mortgage faster. In the long run, it will lower the overall amount you pay in interest.
If you want to be mortgage free faster, then take steps to put as much money as possible towards the principle of the loan. The less of your money that goes towards interest, the better. Remember that higher interest rates over longer terms favor the bank. Don’t overextend yourself, but make every effort keep more of your money over the life of your mortgage.