Holiday Refi? A Do & Don’t Guide to Holiday Financing

A holiday refi can relieve a lot of pressure and stress during holidays as long as you know what to watch out for!

Whether you’re looking to lower your monthly mortgage payments, consolidate debt, or free up cash flow, refinancing during the holidays can set you up for financial success in the new year.

However, the process has its pitfalls, especially during a time of year known for extra spending. Here are the key things you need to know about refinancing during the holidays and how to avoid common mistakes.

Avoid Running Up Credit Card Debt During Holiday Refi

Why It Matters:
One of the most significant factors affecting your ability to refinance is your credit score. When you use your credit cards for holiday shopping, it increases your credit utilization rate—the ratio of your credit card balances to your credit limits—which can cause your score to drop. 

This could affect your loan approval, increase your interest rate, or delay the closing process.

Key Tips to Stay on Track:

• Stick to a Holiday Budget: Plan your holiday spending in advance and avoid making impulse purchases on your credit cards.
• Keep Balances Low: Try to pay off existing balances or make payments as soon as you charge items to maintain a healthy credit utilization rate.
• Monitor Your Credit: Keep an eye on your credit score throughout the refinancing process to ensure it stays in a favorable range.

Remember, your lender may perform a final credit check before closing. Any significant changes to your debt or credit score could jeopardize your refinance approval.

Don’t Skip Your Mortgage Payment for Holiday Spending

Why It Matters:
A common misconception during refinancing is that you can skip your current mortgage payment because your new loan will close before it’s due. While it may be tempting to redirect that money toward holiday expenses, this is a risky move that can lead to financial trouble.

 

What You Need to Know:

• Mortgage Payments Are Still Due: Until your refinance officially closes, you’re responsible for making payments on your existing loan. Missing a payment can hurt your credit score and potentially delay the refinancing process.
• Avoid Late Fees or Penalties: Even if your refinance is scheduled to close soon, lenders still require on-time payments. Late fees or penalties can add unnecessary stress during the holidays.
• Plan Ahead: Set aside your mortgage payment in a separate account so it’s ready when needed, and avoid the temptation to spend it elsewhere.

Skipping your payment could create complications, leaving you financially strained just when you’re trying to secure better terms for your loan.

Consolidating Holiday Debt: Is It a Good Idea?

The holidays often bring increased spending, and some homeowners consider consolidating their high-interest holiday debt into their mortgage. While this can be a smart move for some, it’s not always the best solution.

Pros of Consolidating Debt Through Refinancing:

• Lower Interest Rates: Mortgage rates are typically lower than credit card rates, meaning you could save money on interest.
• Streamlined Finances: Rolling multiple debts into a single monthly payment can simplify your finances.
• Improved Cash Flow: Lowering your overall monthly obligations can free up money for other priorities.

Cons to Consider:

• Long-Term Impact: While your monthly payment may decrease, you’re spreading short-term debt over the life of your mortgage, which could mean paying more in the long run.
• Reduced Equity: Using your home’s equity to consolidate debt leaves you with less equity for future needs, such as home improvements or emergencies.
• Refinancing Costs: Keep in mind that refinancing comes with fees, which may outweigh the savings depending on your situation.

 

Tips for Making the Right Decision:

• Crunch the numbers to determine the true cost of refinancing. Your experienced loan officer can help with this!
• Consider whether the debt you’re consolidating is manageable without tapping into your home’s equity.
• Speak with your experienced loan officer to weigh the pros and cons based on your unique financial situation.

Rate & Term vs. Cash-Out Refinance: What’s the Difference?

When refinancing, it’s crucial to understand the type of loan you’re getting and how it affects your financial goals. Rate & term refinancing and cash-out refinancing are two common options, each with distinct purposes.

Rate & Term Refinance:

• Focused on lowering your interest rate or monthly payment.
• Ideal for homeowners looking to save on interest over the life of the loan or reduce their monthly expenses.
• Often comes with the lowest interest rates compared to other refinance options.

Cash-Out Refinance:

• Allows you to access the equity in your home by borrowing more than you currently owe on your mortgage.
• Suitable for consolidating debt, funding home improvements, or covering significant expenses.
• Typically has significantly higher interest rates and equity (LTV) limits than a rate & term refinance.

Cash Out Now – Rate & Term Refi Later

• • Timing: If you do a debt consolidation loan today, in 6-9 months, if interest rates have dropped, you would be eligible for a rate and term refinance to lock in even more savings.

• Do the Math: Make sure your experienced loan officer is showing you the math.  Multiple refinances can be a very smart financial strategy, and they can also be a money maker for a loan officer.  Make sure it makes sense financially.  Do the math.

By understanding these options, you can make an informed decision about whether refinancing during the holidays is the right move for you. 

Final Tips for a Smooth Refinancing Process

Refinancing can be an excellent way to improve your financial situation, but it’s essential to approach it strategically. Here are a few additional tips to ensure a smooth process:

• Gather Documents Early: The holiday season is a busy time for everyone, including lenders. Having your financial paperwork ready can help prevent delays.
• Avoid Major Financial Changes: Don’t switch jobs, make large purchases, or open new credit accounts while refinancing. Stability is key to approval.
• Work With a Trusted Loan Officer: Having a knowledgeable, professional guide you through the process can make all the difference.

Final Thoughts

Refinancing during the holidays can be a powerful way to set yourself up for financial success in the new year. Whether you’re lowering your interest rate, consolidating debt, or improving cash flow, the key is to avoid common mistakes, like overspending or skipping payments, that could derail the process.

By staying financially disciplined and working closely with a trusted loan officer, you can make the most of this opportunity. Ready to explore your refinancing options? Contact us today for a consultation and take the first step toward achieving your financial goals.