Mortgage interest rates hit record lows during the COVID-19 pandemic. While they have increased slightly from their lowest rate, these low rates are tempting many homeowners to consider home mortgage refinancing.
Refinancing a mortgage can save you money in the long run. Sounds easy enough, right?
Not so fast. While refinancing home loans can make a lot of sense, there are certain refinance mistakes you’ll want to avoid.
Let’s take a look at seven mistakes you don’t want to make and how to avoid them.
1. Not Doing Your Research
One of the easiest mistakes to make when you are refinancing a mortgage is to not do your own research. If you’re just refinancing a home because everyone says it’s a good idea without looking into the specifics, you could be making a costly mistake.
There are a number of things you’ll want to read up about before starting the process.
The Value of Your Property
The value of your property is not a fixed dollar figure. It is possible that your property value has changed since you purchased the property or since you last looked into the question.
You also want to look at your current mortgage to learn how much you are paying in mortgage interest.
Current Mortgage Rates
Take the time to look at a number of different home lender websites. This can give you an idea of what current mortgage interest rates are.
There are closing costs when you are refinancing a mortgage much like there were when you purchased the home. It is important to learn how much you should expect to spend on closing costs for refinancing. This can help to ensure that you are making a good financial decision.
New Payment Amount
There are a number of useful calculators online that you can use to find out what your monthly payment would be if you financed your property Can help you understand whether or not refinancing what makes sense for you at this time.
2. Not Factoring In All of the Costs
In the long run, financing and mortgage can help to save you money That being said, there are some associated costs that will have to face upfront.
Some of the expenses you can expect if you are refinancing a home include:
- Appraisal fees
- Insurance and taxes
- Credit fees
- Lender fees
- Title and escrow fees
In general, closing costs usually amount to roughly 2 to 5% of the value of your home.
It is important to understand that when a lender offers a “no-cost” loan, it usually means that the closing costs are bundled into the loan. While this doesn’t mean that you don’t have to shell out the money at first, it does mean that you’ll end up paying interest on those closing costs.
3. Neglecting to Determine Your Breakeven Point
Because there are closing costs financing, determine how long you have to continue living in your home in order for refinancing to ultimately save you money.
For example, say that locking in a lower interest rate will save you $150 in interest charges every month when you refinance and your closing costs are $6000.
To determine your breakeven point, you can divide the amount saved by the closing costs. In this example, that means that it will take 40 months in order to break even. This means that it will take over three years to even begin reaping the financial benefit of a refinance, so it’s important to determine whether you plan to stay in your home that long.
4. Ignoring Your Credit Score
Your credit score will be faster than the interest rate you are quoted when you are seeking a new mortgage loan. It can take time to rebuild an imperfect credit score, so it’s important to plan ahead and work to improve your credit score so that you can get the best possible interest rate.
5. Not Shopping Around
Another common refinance mistake is not shopping around. It is not necessarily the best deal to refinance with the lender you already have.
The whole point of refinancing a mortgage is to save money. Take the time to look at your different options. Remember to ask about the annual percentage rate in addition to the interest rate.
Refinancing is tempting when it can save you money every month. That being said, it isn’t a good idea to overextend yourself financially in order to make refinancing possible.
It isn’t a good idea to take out a cash advance on your credit card or empty your emergency fund in order to pay for the closing costs associated with refinancing. If getting a new home mortgage isn’t possible for you financially right now, work to save up the money for closing costs rather than going into debt.
7. Assuming That Fees and Rates Are Non-Negotiable
If you have a lender that you would prefer to work with, do not have to assume that the rates and the fees cannot be negotiated. With great credit and some homework, you can get quotes from a number of different lenders. You can then check with the lender you prefer and see if they are willing to match a more desirable offer you received.
Home Mortgage Refinancing: Is Now the Right Time For You?
Home mortgage refinancing can be a sound financial decision depending on your circumstances. However, that doesn’t mean that there aren’t refinance mistakes that can end up being costly in the short-term or in the long run.
Are you interested in refinancing your mortgage loan? If so, you can get a quote today!