Mortgage rates continue to hit new record lows, and homeowners have been quick to refinance and cut their monthly payments, sometimes by hundreds of dollars.
As 30-year mortgage rates head towards 3% or less, you are a good candidate to refinance and save if your current mortgage rate is close to 4%. That’s pretty common, because rates averaged around 4.2% in the spring of last year.
Do you think you are ripe for a refi? Be careful, because mortgages are complicated and it is easy to take a wrong step.
Refinancing errors can be costly. Here are six of the most common ones you’ll want to avoid on the way to getting a new loan.
1. Do not compare prices to find the best offer
You probably wouldn’t buy a new car without comparing prices and comparing prices. The same goes for a plane ticket.
So why would someone take the first mortgage they see? However, studies have found that more than 30% of borrowers never compare mortgages, says the US Office of Consumer Financial Protection.
Recent research from LendingTree found that homeowners who refinance without buying around pay an average of an additional $ 163 per month or $ 1,953 more per year.
So, compare the refinance offers of three lenders, perhaps more. Be sure to ask for loan estimates, says Viral Shah, co-founder of online mortgage lender Better.com.
“The only way to validate an offer and compare two apple-to-apple options when you’re buying rates is to get an official loan estimate,” says Shah. “A loan estimate is a standardized document detailing all the costs associated with your mortgage.”
2. Looking for an interest-free mortgage
Have you heard that the Federal Reserve has reduced interest rates to something close to zero? Yes, that happened, but don’t assume it means there are 0% mortgages available.
Because they are not. Thirty-year mortgage rates have been at the lowest levels in history and are incredibly attractive, but don’t waste your time looking for an interest-free loan.
“A reduction of the Fed interest rate to 0% does not mean that mortgage rates do the same,” says Kimberly Lanham, senior vice president of Digital Risk, a mortgage consulting firm.
There is no direct connection between the Fed benchmark rate (called the federal funds rate) and mortgage rates. Instead, mortgage loan rates are closely tied to the yield or interest on 10-year Treasuries.
Yields have declined and bond prices have increased as concerns about the further increase in coronavirus cases has prompted investors to withdraw money from stocks and put it in bonds as a safer bet.
3. Taking too long to make your decision
Financial markets have been volatile, as have mortgage rates. So don’t linger. Try moving quickly to lock a rate if you see one that works well for you.
“The mortgage market is evolving rapidly. Rate changes and changes in program guidelines are common. What is available today may not be available tomorrow,” said Chris Ryan, mortgage loan officer at Citizens One Home Loans at the Washington, DC area.
If you’re obsessed with trying to time things ju-uuuuuu-ust correctly and get the perfect mortgage rate, you’re likely to miss out on the best deal available.
“The best rule of thumb is if the numbers make sense, take the opportunity,” says Better.com’s Shah. “The cost of waiting to see if rates drop can be instantly counterproductive, without making the risk worthwhile.”
4. Not having your paperwork organized
You could lose a refinance opportunity if you don’t have your “documents” followed.
“Homeowners need to understand the mortgage process and what is expected of them,” says Lanham of Digital Risk. “Having all the documentation on income, assets and taxes makes the process much easier.”
Shah says it is important that your taxes are done on time, if not sooner.
“Your tax returns are used to determine exactly how much you can spend on your mortgage each month. Because a mortgage commits you to years of payments, we want to make sure that your loan is affordable now and later in life.” He says.
According to Shah, lenders will want to see: one to two-year personal tax returns; business tax returns dating back two years, if you own more than 25% of a business; and one or two years of W-2 or 1099.
5. Forget the costs of closing the mortgage.
Refinancing is not free.
“The refinancing includes closing costs similar to what you paid when you got your original mortgage,” says Shah. You must pay fees that include a loan application fee, a mortgage origination fee, an appraisal fee, a settlement fee, and others.
These mortgage closing costs will generally affect you between 2% and 5% of your loan amount, or an average of $ 5,749, according to the latest estimate from real estate data firm ClosingCorp.
If you are unable or unwilling to pay your closing costs upfront, you can have your lender cover some of the expense, but in return, you will be awarded a slightly higher mortgage rate.
“Another option is to ‘incorporate’ your closing costs by adding them to your mortgage balance,” says Shah. “Both options can dramatically reduce your closing costs and make a ‘no cost’ refinance possible.”
6. Don’t be patient
It is true that you must move quickly if you want to refinance your mortgage at one of the cheapest rates today, but then, prepare to relax. The coronavirus pandemic has slowed mortgage processing.
“Lenders handle higher volume levels and it takes patience,” says Ryan of Citizens One.
Borrowers may encounter delays in mortgage approvals and closings due to COVID-19, and title searches can take additional time, particularly in states now receding in their reopens.
“Many town halls and county clerk offices are closed or not configured online to remove these items, and lenders will not close without some of these searches,” says Richard Pisnoy, director of Silver Fin Capital Group, a mortgage broker at Great Neck, New York.
But lenders want to show that they appreciate your patience. “Most offer longer rate lockout periods at the same price as shorter lockout periods, to compensate for the delay,” Pisnoy says.