Do You Make These Mistakes When You Refinance Your Mortgage?
Mortgage rates are still near historic lows, but this won’t last for long. Rates are expected to go up a full percentage point before the year ends. If you’ve been putting off refinancing your mortgage, now is certainly the time — but that doesn’t mean you should rush your decision and make a mistake you’ll be living with for years to come.
Avoid these common blunders as you shop for a new mortgage.
1. Be realistic about your home’s value
While home values are rising, many homeowners still over-value their home and receive higher-than-expected refinance offers. Don’t convince yourself that your home is worth more than your neighbor’s home! A low home appraisal is the number one cause of denied refinances, because lenders will not loan more than the appraised value of the home.
2. Lock in while you can
If you put off locking into a good mortgage rate, you risk making the refinance uneconomical — and you could end up paying more than you would save. If you float, rates could rise enough that it’s not worth the time and money to refinance. Remember that rate locks have an expiration date, too, so create a cushion in case there’s a delay in closing. This means set a closing date on the 28th day of a 30-day rate lock, for example.
3. Don’t start over with the same mortgage term
Don’t do long-term damage to your future by refinancing for a full 30-year term. If you’re even 2 years into a 30-year loan now, refinancing at the same term means you’ll take 32 years — not 30 years — to pay off the mortgage. Avoid putting yourself back at square one by refinancing into a 25-year, 20-year or 15-year term instead.
4. Don’t focus on just the interest rates
Interest rates are important with any loan, but the loan terms, closing costs and points are also very important. Do you know the total cost of the refinance? How much will you save? Is refinancing worth it? Don’t assume a lower rate than you have now means automatic savings, because the costs associated with the loan may cancel out savings.
5. Understand the difference between no-cash and no-cost refinances
Sometimes lenders just add the closing costs for the refinance onto the loan amount. While you may not need to bring cash to the table with a no-cash refinance, you could end up owing $215,000 instead of $210,000. Even with a lower rate, that might not be worth it.
Pay attention to the principal you owe on your old loan and compare it to the new loan. Considering the fact that you pay almost nothing toward principal in the first few years of a 30-year mortgage, adding closing costs on top of the balance will only hurt you.
6. Know your credit score
Want to refinance into a lower rate but don’t know your credit score? You may be in for bad news if your score isn’t high enough to get approved. You should also know that a score of 740 will qualify you for the best rates
7. Don’t go with the first offer you receive
Don’t lose sight of what a major decision it is to refinance a home loan. Check several lenders on the same day and analyze points, rates and fees to find the best deal. Start with a mortgage broker, then compare quotes online.
8. The best mortgage may not be the same type you had
This surprises many people, but sometimes it’s better to refinance into a different loan. Sometimes it will be better to refinance into a 15- or 10-year mortgage. If your income has gone up significantly, or you’ve paid down a lot of your principal and can afford higher payments, you can save substantially by reducing the term. If you’re close to paying off your mortgage, it might make sense to get a 5/1 ARM, too. Your rate will be lower than a fixed-rate mortgage, and it will stay at that rate for 5 years. Refinancing can even allow you to get rid of private mortgage insurance!
9. Not refinancing when it’s right
The biggest mistake you can make? Not refinancing at all when the time is right for you. Some people go on for decades paying up to 4% over the going rate. You may be paying thousands extra every year in interest — enough to potentially max out your IRA contributions for the year and secure your future — just because you don’t want to bother. Refinancing isn’t always right, but when it is, make your move.