Five Costly Mortgage Refinancing Mistakes To Sidestep
Mortgage refinancing has several great benefits if used properly. But, not considering important factors could be costly and endanger your home. Here are 5 costly mortgage refinancing mistakes you must avoid.
Blunder #1: Failure to lock in your rate
Mortgage rates are very erratic. Interest rates can change as your loan is being processed. So if you failed to lock your home mortgage interest rate in, you might be offered a different rate than what you’ve anticipated. Ask your lender to lock in the rate you are happy with; put it in writing and confirm it when the processing of your loan is done. Take note: lenders will not lock in your rate without your request.
Blooper #2: Failure to get several quotes
There are hundreds of mortgage providers out there. Every lender provides much the save service but they differ from one another in some areas. This is why you have to get more than one quote to get the best rates. You may think that one mortgage company is just like any other, but you should shop around for mortgages just like you would for a car. Spend some time comparing different companies. Find out the requirements to get the lowest rates. Find the company that gives you the best rate and bypass the other companies.
Oversight #3: Refinancing too often
As interest rates fall you may be inclined to reduce your rate and lower your monthly mortgage payments. But, do not do this too often. You need to understand how the fees to terminate a loan early and originate a new loan figure in to your long term savings from the lower rate. Closing costs will pile up which really defeat the purpose of refinancing.
Mistake #4: Failing to figure out your break even point
Again, there is a price to pay to terminate your existing loan and getting a new one, but there are far too many occasions where home owners fail to recognize this.
It’s easy to compute your break even point. Suppose you refinance to save $200 a month on your mortgage payments and the fees you paid to refinance were $2000. The easiest thing to do is to divide your fees by your monthly savings and you will get the break even point ($2000/$200). In this example, it will take you 10 months to recover the cost of refinancing. To say it differently, during the first 10 months you have not seen any savings at all. This is also connected to #3.
You may already have refinanced your current loan. If so, have you reached the break even point? If not, you need to extend your calculated break even point to take your previous refinance into consideration. Determining your break-even point will also determine how long you will have to stay in your home before starting to get savings.
Mistake #5: Refinancing without a plan
Too many home owners decide to refinance whenever the rates drop. You should understand that this is wrong. There are other conditions to determine if it is the right time to refinance your home and not just by looking that the prevailing rate.
To make a wise refinancing decision, consider some of the following ideas. Delay refinancing …
… if you won’t be staying in your home beyond the break even point
… if you have not been paying for your current loan for several years
… if you will pay off your current mortgage is just a few years
… if you have a bad credit score consider credit repair before applying for a new mortgage
… if the current market value of your home is declining
… if you have no equity left in your home
Avoid these blunders and you can make refinancing your mortgage a happy experience.
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Tags: HUD Homes
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