Preparing For Re-Financing before buying or selling a new home

Financing Basics

When you make the decision to sell your home, you’re entering an active real estate market. If you play your cards right, your home can sell fast. An overwhelming number of buyers borrow money to purchase real estate, so understanding how the lending process works is important.

Calculating your Budget

If you don’t already operate from a formal budget, part of the process in selling your home should be to create a financial statement that shows your income, your debts, and how your finances fit into the big picture. Finance professionals can help you with this, but the process isn’t hard if you follow a few basic steps. From the your big picture financial statement, prepare a budget that includes all of your monthly fixed expenses (current mortgage, car payments, utilities) and your best estimates for the variable ones, such as food, gasoline, and entertainment. As you document this information, make note of the balances on any outstanding loans and how much you are paying each month. If you have some small debts hanging out there, it’s a good idea to pay them off. A budget can help you see areas where you can reduce monthly spending in order to apply the savings to paying down your debts.

What Lenders Are Looking For

While a history of responsible credit is good when applying for a loan, too many small loans or debt obligations are not. A good rule to consider: the fewer debts you have on your financing application, the better. Many finance experts recommend that if you have several small loans, you consolidate them into one loan to achieve a better interest rate and an easier to manage payment system. This also may look more favourable on your loan application than several smaller debts and obligations. Once you have paid down any debts, and once you have consolidated your smaller loans, speak with your current lender as well as other banks to find out how much money you can qualify to borrow for a new home. Once a lender has told you how much you can borrow, you will have an important piece of information to use when looking for your next home or evaluating offers on the home you are selling. When determining your borrowing power, also keep in mind any costs that may be associated with closing out your current loan. If your bank has pre-payment penalties, you will need to factor those costs in to your costs at settlement.

Staying on Top of Your Mortgage

Variable rate mortgages often offer what the industry likes to call “honeymoon rates,” which are lower interest rates early in the loan life. These rates increase to larger interest rates down the road. If you decide to accept terms like this, be sure to keep an eye on your budget and make sure you’re prepared when the time comes for your rate to jump. Often these mortgages are structured to jump periodically, such as every 12 – 36 months. Some mortgages adjust upward with the market. Be sure you know what you’re getting into before you sign any mortgage documents.

It’s good to periodically test the market for better rates; especially if you have a good credit history or if you get additional debts paid off after securing your mortgage.