Maximize your benefits from a mortgage refinance by avoiding these pitfalls. (iStock)
Mortgage rates are at their lowest point, and those on a 30-year fixed-rate mortgage fall below 3 percent for the first time in 50 years. Consequently, record refinance rates have opened the doors for many homeowners to want to refinance their existing home loan to reduce their monthly payments, speed up their loan payment, or gain access to their home equity.
However, before going ahead with a refinance, it’s important to know what the common pitfalls are with the process and how to avoid them. Here are some to keep in mind.
1. Don’t go shopping
To make sure you get the lowest rate you qualify for, it’s crucial that you take time to shop around and compare rates from multiple lenders. Even if you are using a broker, they may be limited to certain lenders.
You can compare lenders and refinance rates by visiting Credible.
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2. Focus only on the rate
There are many different factors that determine the interest rate on your mortgage, and one of them is the mortgage points. A lender may offer a lower rate to match or exceed a competitive offer. But the bank may be charging you more in the form of mortgage points to make this happen.
Also, keep in mind that your credit score is an important factor in determining your rate. Therefore, check your credit and consider whether you should work to improve it before applying.
If you are considering buying a new home or want to refinance your mortgage, use Credible to connect with experienced mortgage lenders to compare accounts, including rates, point value and costs.
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3. Failure to verify all loan costs
Refinancing your existing home loan involves creating a new loan, so you can expect to pay closing costs. In general, the closing costs of a refinance will range between 2 and 6 percent of the loan amount.
You can choose to pay these costs out of pocket or transfer them to the new loan. If you have little cash, the second option may sound attractive. But keep in mind that you will pay interest on that additional amount for several years.
Visit Credible to explore refinance options and associated costs.
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4. Charge for the wrong reasons
A cash withdrawal refinance allows you to access some of your home equity in the form of cash. You can use this money to consolidate debts, buy a divorced spouse from your household interest, do renovations, and more.
But if you use it for unnecessary things like vacations or to live beyond your means, you could come back to haunt it.
Also, keep in mind that you will have a limit on the amount you can get in a cash withdrawal refinance, usually up to 80 percent of the home’s value, so check with lenders first to make sure they can even help you solve your current problem. .
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5. Do not calculate your break-even point
If you are refinancing for a lower interest rate, it is important to consider how long you plan to stay in the home. That is especially the case if you are paying the closing costs out of pocket. For example, if a lower rate can save you $ 120 per month, and your loan closing costs are $ 4,560, it will take you 38 months to recover those costs in the form of monthly savings.
If you don’t plan on staying in the house for that long, refinancing will really cost you money and probably not worth it. Use an online mortgage refinance calculator to determine your new costs and compare them to the initial costs of obtaining the loan.
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6. Extending your mortgage
If you’ve been making payments on your home loan for five years, it may make more sense to refinance on a 25-year loan than on a 30-year loan. If you refinance with a longer repayment term, it will ultimately cost you more money on interest charges, even at a reduced interest rate, as you will be making payments for an additional five years.
7. Try to calculate mortgage rates
If you are delaying refinancing because you want to wait until rates drop further, you may regret it. Trying to time refinance rates is like trying to time the stock market: it is impossible and you could end up missing out on a good deal if rates go up. If now is the right time to refinance for all your other reasons, do so.
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The bottom line
A refinance can be a great way to achieve some of your financial goals, but it is important to know what you are getting into and how to avoid potential problems that may cost you. For questions, visit Credible to contact an experienced loan officer for answers.
