List of Mistakes While Mortgage Refinancing
Introduction Mortgage Refinancing Mistakes
Mortgage Refinancing could be one of the most intimidating experiences that you might have to go through. When you decide to refinance your mortgage, the goal is to trade your current mortgage for a new one either to reduce your interest rate or to tap into your equity.
Today we would be discussing mistakes to avoid before you decide to mortgage refinancing that can result in higher costs.
1: Refinancing Only to Obtain a Lower Rate
Get clarity on why are you refinancing your mortgage loan. Are you trying to save money through a lower monthly payment? Are you trying to reduce your interest rate? Are you trying to get a cash-out with your refinance?
If you are deciding to refinance for a lower interest rate, make sure you calculate related fees and closing costs. These fees might make you rethink the process. Unless you can save enough money to cover these costs easily, refinancing may not be right for you.
2: Cash-out Refinance To Pay Off Unsecured Credit Card Debts
Many people opt for what is called a cash-out refinance. This, not only can save money on your monthly mortgage payment but can provide cash to pay off high-interest credit cards. We recommend you review all of your options before choosing this path.
Are you desperate enough to get rid of the unsecured debts, that you would consider putting your home at risk? You may want to check for any other option and save your home equity for more important reasons in the future. You can always refinance without touching your home equity.
3: Not Asking About Points
Points are nothing but upfront mortgage interest fees paid on loan to reduce the initial interest rate. Points are fees that the borrower pays the lender at the time of closing. One point is one percent of the loan amount. So, if you are refinancing a loan amount of a hundred thousand dollars and the lender is charging one point.
You will pay the lender fees of one thousand dollars at the loan closing point, but you will reduce your long term interest rate which will save you money throughout the life of your loan. Some loan rates have points already built-in, so you need to make sure the lender is very clear on how many points are being charged.
4: Refinancing for ARM or Interest-Only Loan
In some cases, it makes sense to refinance into an Adjustable Rate Mortgage (ARM) or interest-only loan. But be aware of ramification. While you might refinance into an ARM and initially save money, over the years your interest rate may creep up and result in eating up your refinance savings.
Interest-only loans are another popular option, but they are not right for everybody. In an interest-only mortgage, you are making payment which includes only the interest part of your loan for a short period like five to ten years. This means that eventually, your payment will start to include the principal again.
If you can’t afford to pay the principal at that time, be forced to refinance all over again. To avoid getting in such situations, we would suggest you always plan for the long term.
5: Not Getting a Guaranteed Lowest Bottom Line Cost
All lenders are required by law to provide what is called a good faith estimate of closing costs. Use this good faith estimate to find the lowest price. You should ask any lender you speak with for a guarantee that clearly states in writing that they have the lowest bottom line closing costs.
If they can’t provide you with such a guarantee in writing, then you should find another lender.
6: Not Evaluating Your Credit
Your credit history is one of the most significant parameters that are considered by mortgage lenders. Make sure you do not have any errors on your report before you decide to refinance. Even an increase of one point in your credit score can result in tremendous savings.
Lenders might want to check your credit through all the three bureaus. You can order your credit report from Equifax, TransUnion, and Experian. When lenders pull your credit, they consider the middle score of all three bureaus. Make sure your credit history does not show any debts or loans that you have already cleared.
Conclusion
Taking care of a few things before mortgage refinancing might help you get the right loan. When you decide to refinance, make sure you shop around for the best options available. Giving a chance to other lenders and mortgage brokers might result in a substantial amount of savings.
There are many other potential mistakes people can make while mortgage refinancing. It is best to find a professional loan officer to help you through the process.
References: https://www.compareclosing.com/blog/mortgage-refinancing-mistakes/
