- 3 mortgage refinancing mistakes that could prevent you from getting the best deal
- 1. Not shopping around
- 2. Not doing the math
- 3. Refinancing with less than 20 percent equity
- Is a mortgage refinance right for you?
- 10 Mistakes to Avoid When Refinancing a Mortgage
- 2- Fixating on the mortgage rate
- 3 – Not saving enough
- 4 – Trying to time mortgage rates
- 5- Refinancing too often
- 6 – Not reviewing the Good Faith Estimate and other documentats
- 7- Cashing out too much home equity
- 8 – Stretching out your loan
- 9 – Agreeing to prepayment penalties
- 10- Paying junk fees
- The best way to refinance
- 2. Failing to comparison shop
- 3. Tapping home equity too aggressively
- 4. Refinancing too often
- 5. Not checking your property value
- 6. Assuming fees are non-negotiable
- The best way to refinance a mortgage
- What are today’s mortgage rates?
3 mortgage refinancing mistakes that could prevent you from getting the best deal
Coronavirus has had a profound financial impact on household finances for many Americans. It's also caused the Federal Reserve to reduce interest rates.
For those looking to save during these troubled economic times, the low mortgage rates available today present a golden opportunity to refinance your mortgage loan into a new one with reduced rates and fees — plus, lower monthly payments.
However, refinancing isn't the right choice in every situation and those considering a new loan to repay their old one should be certain to research their options carefully. You can visit Credible to compare mortgage lenders and see personalized offers within just minutes to ensure you're getting the best deals while rates are low.
HOW TO GET THE BEST MORTGAGE REFINANCE RATES
But don't forget to do your homework before committing to a mortgage refinance. Read on to find out about three common mistakes that can cost you money.
1. Not shopping around
When you refinance, you don't have to stick with your current mortgage lender. In fact, you can take your pick of any bank, online lender, or credit union that offers you low mortgage rates. To make sure you find the mortgage provider that will charge you the least for your new loan, get multiple quotes from lenders and calculate the total cost.
Credible makes it easy to compare refinance rates and lenders as you can get pre-qualified for a home refinance in just minutes. Shopping around with Credible won't affect your credit score and you can complete the entire refinance process online if you find a lender you .
IS IT WORTH IT TO REFINANCE FOR 1 PERCENT?
2. Not doing the math
Although refinance rates are low right now, that doesn't mean it's always a financially sound choice. You'll need to make sure your credit is good enough to qualify for a loan at a low rate. You can see your personalized rates within minutes — with no impact on your credit score — by filling out some simple information online now.
WHAT APR MEANS ON YOUR CREDIT CARDS AND LOANS
You'll also need to consider the closing costs associated with a mortgage refi. These costs can run you between 2 percent and 5 percent of the amount you're borrowing, which adds up quickly. If you're refinancing a $300,000 mortgage, you could owe as much as $15,000 in closing costs.
If you lower your payment enough and plan to stay put in the house for long enough, eventually the money you save by refinancing will make up for what you paid upfront in fees.
7 BEST CITIES FOR A MORTGAGE REFINANCE
However, if you plan to move within the next few years, you probably won't get back the money you put out.
Say, for example, you took out a 30-year mortgage for $300,000 in January 2017 at 4.25 percent and you want to refinance the remaining balance to a new 30-year loan at a 3.25 percent interest rate with $5,000 in closing costs.
You'd save about $245 on your monthly payments so it would take you roughly 22 months for your interest savings to offset the up-front fees. If you didn't stay in the house that long, you wouldn't get your $5,000 back.
But if you didn't move and kept paying your mortgage for 30-years, you'd end up saving more than $25,000 in the long-run.
Some mortgage lenders offer refinance loans without closing fees, but be aware these loans usually come with a higher interest rate.
And sometimes it's possible to make your new loan large enough to cover closing costs so you don't have to pay them pocket.
If you opt for this approach, you'll have to pay interest on closing costs though — which means you'll pay more over time and reduce the savings from refinancing.
3. Refinancing with less than 20 percent equity
If you owe more than 80 percent of what your home is worth, it may be difficult to find a refinance lender. And if you do find one, you'll ly have to pay private mortgage insurance. This costs you money but only protects the lender from losses in case of foreclosure.
THE BASICS OF NO-CLOSING COST MORTGAGE REFINANCING
If you weren't paying PMI on your current loan but would have to on your new one because property values have dropped or because you're opting for a cash-out refinance loan, this insurance cost could negate any savings that come from refinancing.
Is a mortgage refinance right for you?
While mortgage refinancing can lower your payment if you're struggling, you do need to qualify for a new loan. If you're looking for short-term help because coronavirus has affected your income, consider other mortgage relief options as qualifying for low-interest rates on a mortgage refi might be a challenge without stable employment.
But if your finances are in order and you hope to save on mortgage payments over the long-term, refinancing may just be the best option for your needs. To make your choice, visit Credible today to learn more about mortgage refinancing and to compare rates and terms to see if you can save.
10 Mistakes to Avoid When Refinancing a Mortgage
With mortgage interest rates as low as they are right now, homeowners can save a lot of money by refinancing their home loan. But it's not as simple as finding a good interest rate and jumping on it – there's a lot more to it than that.
Here are 10 mistakes that homeowners frequently make when refinancing a home mortgage:
It's amazing how many borrowers simply go straight to their regular bank when they need a home loan or a refinance. Or how many simply check a few advertised rates and pick the lender offering the lowest one. Or who assume they have to refinance with their current lender.
When shopping for a mortgage refinance, it pays to check out the competition – big time. A difference of a mere one-eighth or one-quarter of a percentage point on your mortgage rate can mean a savings tens of thousands of dollars over the life of your loan.
Mortgage pricing can also be complicated, with many factors affecting the actual cost, so it pays to look carefully into rates, terms and fees offered by different lenders. Take your time and find your best deal.
2- Fixating on the mortgage rate
One of the biggest mistakes borrowers make is focusing solely on the interest rate when comparing mortgage lenders. A lot of factors go into mortgage pricing and a low refinance rate from one lender can actually cost more than a higher rate from someone else – a lot higher.
Closing costs can vary widely from lender to lender, and a seemingly low rate is sometimes used to disguise a loan with unusually high fees. Often, advertised rates are the borrower paying for discount points, a way of buying a lower rate.
Be sure to inquire about such things as the loan origination fees, points, credit reports and all other fees before applying for the loan. These aren't finalized until you receive your Good Faith Estimate once you apply, but any major changes at that point are a red flag that something's amiss.
3 – Not saving enough
If you only get a small reduction in your interest rate, say half a percentage point, it's going to take you a long time to recover your closing costs.
This is what's known as the break-even point – how long it takes your savings from refinancing to exceed what you paid to refinance.
For example, if you paid $5,000 in closing costs and you saved $100 a month by refinancing, your break-even point is 50 months – just over four years.
But if you save only $50 a month, it will take you eight years to break even – and you might have sold the home and moved by then.
Most experts say you need to knock at least three-quarters or a full percent off your current rate to make refinancing worthwhile. High-end homes can justify a smaller rate reduction than more modestly priced ones, because the savings are much greater. A small reduction can also be worthwhile if you plan to stay in the home a long time.
4 – Trying to time mortgage rates
When interest rates are low, borrowers may watch daily changes in refinance rates, trying to jump in at the spot when rates are at their absolute lowest. But they often miss the boat completely and see rates go shooting back up again.
Timing mortgage interest rate is trying to time the stock market – it's difficult even for savvy professionals. Look at it this way – rates are still lower than they've been for most of the past half century – getting greedy over fractions of a percent could translate to a lost opportunity.
5- Refinancing too often
With interest rates near record lows, many people who've already refinanced their mortgage are rushing to do so again, to lock in the lowest rate possible. While that's an attractive proposition, it's one that can lead you into trouble if you're not careful.
The problem is that refinancing costs money. To refinance a mortgage, you'll typically pay about 3-6 percent of the loan balance in closing costs, perhaps less on high-balance loans. So for refinancing to make sense, you need to save enough in interest to eventually cover the closing costs.
Some homeowners, in chasing ever-lower rates, make the mistake of refinancing too often. They pile up closing costs over time, so their loan balance keeps increasing – negating the benefits of refinancing in the first place.
6 – Not reviewing the Good Faith Estimate and other documentats
The Good Faith Estimate is a breakdown of the total cost of the mortgage, including the APR (interest rate) and all fees.
Look it over carefully and make sure it matches up with what you were told before you applied – if there's a significant difference, consider looking elsewhere.
Also, check over your final documents at closing to ensure they match the Good Faith Estimate, especially when it comes to fees – some unscrupulous lenders will try to tack on various nickel and dime fees at this point to generate extra income on the loan.
7- Cashing out too much home equity
Many people use a mortgage refinance as an opportunity to borrow against their home equity, taking out some cash for things for home repairs, investments or a major purchase. Because the rates are low compared to other types of loans and mortgage interest is usually tax-deductible, it's an attractive way to borrow money.
The problem arises when homeowners take out too much equity that they leave themselves exposed should housing prices fall (as happened dramatically in recent years) or boost their mortgage payments so much that they have almost no margin for error if financial problems arise. Be conservative in taking any money your home and be sure to leave yourself a healthy cushion in home equity.
8 – Stretching out your loan
Most homebuyers start out with a 30-year mortgage. By the time they're ready to refinance, they've been paying on it for a number of years. But if they refinance into a new 30-year mortgage, they're starting all over again.
Extending your mortgage this can significantly reduce your monthly payments. After all, you're spreading out your remaining loan principle over a longer period. But it will ly cost you more in interest charges over the long run, even if you get a lower mortgage rate, because you're amortizing the loan balance over a longer time.
A better approach is to refinance into a new, shorter-term loan that closely matches the time left on your current mortgage.
For example, if you've been paying on a 30-year mortgage for 7-8 years, you might refinance into a 20- or even a 15-year loan instead.
Because shorter-term mortgages have lower rates, you can often shave several years off your mortgage with little or no increase in your monthly payment.
Extending your loan term can make sense if you're financially stressed and need to reduce monthly expenses, or if you're doing a debt consolidation loan or other type of cash-out refinance that increases the balance on your primary mortgage. Just be aware of the costs of doing so.
9 – Agreeing to prepayment penalties
Though they aren't common, some mortgages will have buried in the fine print a prepayment penalty if you pay off the mortgage ahead of schedule – such as you would do if you sell the home or refinance again. Which you may want to do.
These often expire after a few years and are a common feature of “no-cost” refinances, where the lender waives the closing costs but makes up for it by charging a higher rate. The penalty ensures that lenders still get paid if borrowers sell or refinance before they can recover those costs through the higher rate.
In some cases, a lender will offer a slightly lower rate if the borrower will agree to a prepayment penalty. Borrowers with poor credit may also be required to accept a prepayment penalty in order to get their loan approved.
Aside from those, there's really no reason for a refinance to have a prepayment penalty, particularly one that still applies after more than 3-5 years.
10- Paying junk fees
Just with any other mortgage, borrowers need to be on the lookout for “junk fees” added on to the regular closing costs.
While things loan origination, application and title fees are unavoidable and legitimate, some lenders will add charges for things “document preparation” or overcharge for obtaining credit reports or document delivery.
The general rule is, if it's something you could do yourself or hire someone to do for less, there's a good chance it's a junk fee.
The best way to refinance
Starting the mortgage refinance process can be intimidating.
The goal is to trade in your current mortgage for a new one that helps you reduce your rate and build equity faster.
But making mistakes during the process can result in higher costs.
The best way to refinance involves knowing the most common mistakes and how to avoid them.
Six mistakes are most common in today’s refinance market. Here’s how not to make them.
Verify your refinance eligibility (Mar 25th, 2021)
In this article (Skip to…)
The best way to refinance is to know the most common mistakes and how to avoid them:
Your credit history is one of the most important criteria lenders look at when you refinance.
A one-point credit score increase — from 679 to 680 — could reduce your mortgage fees by one point. That’s $1,000 for each $100,000 borrowed.
Purging errors with a rapid rescore can raise your credit score by as much as 100 points in less than a week.
According to the Federal Trade Commission (FTC), 20 percent of credit reports contain wrong information. Five percent are so serious that they may burden the consumer with a much higher mortgage interest rate.
Before you start a refinance, order your credit reports from Equifax, TransUnion and Experian. Consumers, by law, are entitled to one free credit report per year from each major bureau.
Immediately report any errors. The bureau must remove any line it can’t prove is yours.
2. Failing to comparison shop
A Consumer Financial Protection Bureau (CFPB) survey discovered that nearly half of all homeowners requested a quote from just one lender.
Consumers who received rate quotes from multiple lenders cut their interest rate by as much as 50 basis points (0.50%).
That’s more than $14,000 in mortgage interest savings on a three hundred thousand dollar loan over ten years.
Your current lender or local bank may not offer the best deal. Compare rates and fees from three to four lenders before you decide on one.
Compare refinance rates. Start here (Mar 25th, 2021)
3. Tapping home equity too aggressively
About one-in-four homeowners are “equity-rich,” according to a recent study.
That means they have at least 50% equity in their home — money that can be tapped to accomplish other financial goals.
But one common mistake is financing short-term expenses with a long-term loan.
For instance, a car with a five-year life may not justify a 30-year mortgage loan. wise, a mortgage is an expensive way to pay for a month-long cruise.
Homeowners may receive more value by investing in home improvements, a college education, or a promising business venture with proceeds from a cash-out refinance.
Will your equity, if tapped, yield long-term returns? If the answer is “yes,” then a cash-out refinance might be your next step.
Check your eligibility for a cash-out refinance (Mar 25th, 2021)
4. Refinancing too often
Mortgage interest rates are far below their historic norm.
Homeowners who purchased a home as little as one year ago ly stand to save by refinancing at today’s rates.
Buy a refinance isn’t always the right decision.
Here’s why: frequent refinancing extends the mortgage term again and again.
Remember, a refinance after five or ten years “resets” the loan, often to 30 years. The rate and payment fall dramatically while yielding little or even negative savings.
Sometimes the lowest possible payment is priority one for a homeowner with limited cash flow. Perhaps a divorce, layoff, or illness reduced income. In these cases, extending the loan could be a wise move.
However, financially stable borrowers should focus on lifetime savings.
One strategy many homeowners employ is to refinance into a mortgage with a shorter term. 15-year refinances are growing in popularity
Alternatively, make additional principal payments to avoid extending your repayment timeframe.
Verify your refinance eligibility (Mar 25th, 2021)
5. Not checking your property value
A survey by Fannie Mae revealed that a substantial number of U.S. homeowners underestimate the value of their homes – in part because they don’t realize how much home prices have risen in recent years.
Without an accurate estimate of your home’s value, you could easily pay too much to refinance the mortgage.
If your estimate is too low, you can overlook savings opportunities. Adequate equity lets you eliminate mortgage insurance or obtain a lower interest rate.
Conversely, if your estimate is too high, you may not receive your desired mortgage rate. Less equity can mean higher rates.
Yet, some loan products do not take into consideration your home’s value.
The FHA streamline refinance does not require an appraisal, and is available to current FHA homeowners.
wise, VA loan rates are not the home’s value. Your current VA loan is the litmus test for eligibility. The lender does not typically request an appraisal, saving the applicant the associated fee.
However, if your loan type requires documented home value, there are several ways obtain a realistic estimate.
Online valuation tools have improved. Even better, request a Broker’s Price Opinion (BPO) or Comparative Market Analysis (CMA) from a local real estate agent. The cost, if any, is a fraction of a typical appraisal fee.
6. Assuming fees are non-negotiable
You don’t have to accept a refinance offer “as is.”
In addition to interest rates, many fees may be negotiable. Multiple offers may persuade lenders to compete against each other for your business.
Third-party fees title and escrow may be negotiable, depending on your state’s laws.
Provided you have good credit and have done a little comparison shopping, you should have enough leverage to bargain for a better deal.
The best way to refinance a mortgage
A refinance is simply trading your current loan for a new loan that is better in some way.
Some homeowners refinance to lower their payment or interest rate. Some refinance to turn pent-up home equity into needed cash. Still others refinance into a shorter term, a 30-year loan into a 15-year one.
Any refinance is completed with essentially the same process:
- Make sure the refinance benefits you. Know your ultimate goal and see if you can achieve that. If you need a lower rate, make sure current rates are low enough. If you need cash out, make sure you have enough equity
- Contact a lender. Yes, this can seem scary, but, by law, there is never any obligation to proceed with a refinance. You can cancel the whole thing up to the day before closing! But a lender, in minutes, can give you an accurate rate quote, check your credit, and send you numbers in writing
- Shop for rates. You can reduce your rate by as much as 0.50% by contacting a few different lenders
- Make full application with your chosen lender
- Sign initial disclosures that the lender will send you. Verify loan terms on the disclosures. Make sure you are still accomplishing your goal (lower rate, cash out, shorter term, etc.)
- Provide documentation to the lender such as income and asset verification
- Submit loan conditions. The lender will submit your paperwork to the underwriter, who will request additional needed items, if any
- Sign final paperwork which the lender prepares. You will sign at the escrow company
- Wait 3 days. This is the rescission period — a “cooling off” period in which you have the chance to cancel the refinance at no cost. (Remember: your current loan is still intact and no changes have been made to it. Simply continue making payments)
- Check with the lender on the 4th day. The loan will “fund,” meaning it’s a done deal. Your previous loan has been paid off in full.
- Start making payments on the new loan. The first one will be due 30-60 days after funding
Follow these steps, and you should be able to meet your refinance goals — whether you want to save money, pay off your mortgage faster, or cash out on your equity.
Verify your refinance eligibility (Mar 25th, 2021)
What are today’s mortgage rates?
Mortgage rates are low and continue to sit below historical levels. Today’s rates combined with refinance best practices yield solid value for homeowners.
Request a refinance rate today to see how much you could save.
Verify your new rate (Mar 25th, 2021)