Home Refinancing Mistakes You Must Avoid
With mortgage rates at levels that are considerably lower than they were during the 1990s, refinancing of a current loan is one way for homeowners to reduce their homeownership costs. However, not all refinancing decisions are equal, with some working against the homeowner. Please read on to learn about refinancing mistakes you must avoid.
Below Average Credit – A fair or poor credit rating can cause you to pay too much for a loan. In most cases it is advisable for you to improve your credit rating first before applying for a loan. A higher interest rate could cost you thousands of dollars more than the rate you would receive if your credit was good.
Rate Difference Is Negligible – When refinancing, seek a rate that is a full percentage point lower than what you are paying now. If closing costs are absorbed by the mortgage company (or bank), then even a half point rate change could be beneficial. Prior to refinancing, determine what your share (if any) of the closing costs will be.
Selecting an Incorrect Loan – When refinancing, if you switch from a fixed rate home mortgage to an adjustable rate home mortgage, you could find yourself paying more over the lifetime of the loan especially if interest rates are on an upward trend. Initially, you could see some short term savings, but these same savings could be eclipsed by long term increases in your mortgage interest rate, rendering the initial savings as useless.
Reexamine Your Current Loan – The loan you currently have could meet your needs except for one thing: private mortgage insurance [PMI]. You may still be paying this insurance which isn’t necessary once your equity has past 20% of the home’s value; with home prices rising sharply, you may have reached the 20% figure a lot sooner than you think.
Do Some Serious Shopping – When seeking a new loan, shopping around can yield some terrific savings. You aren’t required to refinance through the same lender, nor must you even shop locally. Thanks to the internet lenders from across the US are eager to provide a mortgage to you.
Examine the Contract – You need to determine whether the loan you are about to take is a total refinance and not a home equity loan. Although there isn’t anything wrong with a home equity loan, you don’t want that type of loan if you are seeking to refinance – do not let a lender talk you into something you do not want.
Penalties For Repayment – Most lenders will not penalize you for paying off the loan early, but there are loan agreements where prepayment penalties are included. Make certain you read the entire contract before signing.
Most definitely if you are not careful you could agree to a refinancing deal that isn’t to your liking. Take your time to shop, research, and narrow down your options and only sign a contract if you are fully convinced that the new loan offers a better deal than the old loan.