Want to take advantage of a lower mortgage rate? Looking to switch from an adjustable- to a fixed-rate loan? Need to tap into the equity in your home to cover a large purchase? Any one of these are good reasons to consider refinancing your mortgage.
But while a refinance may be just what you need to do to save some cash, how you go about it makes all the difference. Make sure you avoid the following refinancing mistakes before committing yourself to one.
1. Assuming Your Home is Worth More Than it Actually is
There are a bunch of reasons why you might want to consider refinancing your mortgage, and one of them is to tap into the equity that you’ve built up in your home. Whether you need to pay for your kid’s exorbitant college tuition fees, or are planning on taking a long-awaited trip around the world, you’re going to need a good chunk of change, which you can siphon from the equity in your home.
Much of your home equity depends on what the current market value of your property is. Do you really know what your home is actually worth? Just because it may have been appraised at $250,000 a couple of years ago, for instance, doesn’t necessarily mean it’s worth that much now. Real estate markets fluctuate, even though they tend to increase over the long haul.
Have you even had your home appraised at all? It would be a crying shame to refinance your mortgage assuming that your home is worth more than it really is, only to wind up with a refinance offer that’s higher than you expected simply because there’s not enough equity in your home.
2. Making Huge Purchases on Credit Right After Applying For a Refinance
Fiddling around with your credit score when applying for a refinance is a bad idea. When it comes to refinancing, you want to make sure that the rate you wind up with is the one you anticipated from the get-go. Don’t go out and buy a new vehicle or take out a student loan right in the midst of your application.
Piling on the debt is the last thing you want to do, as it will do nothing but negatively affect your credit. Your lender just might decide to slap you with a higher rate, or deny your refinance altogether if you’re deemed to have too much debt on the books.
3. Not Shortening Your Mortgage Term
While it’s nice to have a lower monthly payment, your ultimate goal is to pay your house off in full in as short a time period as possible. Doing so will allow you to cut back on the total amount that you’ll have to pay towards interest. When you refinance your mortgage, you’d be making a huge mistake if you don’t consider shortening the length of your loan.
Let’s say your current mortgage has a 30-year amortization period, and you’ve been paying it for three years now. If you refinance to another 30-year mortgage, you’re basically putting yourself in a position to pay your home off in 33 years, considering the three years you’ve already been paying. Not only that, but you’ll probably be paying more in interest that you would have had you not refinanced at all.
4. Not Knowing That You Can Annul the Mortgage Deal
If you’re in the market to refinance your mortgage these days, you’re in luck. With the new Truth In Lending Act (TILA) that came out just last year, borrowers have a lot more rights when it comes to the information they’re privy to. In addition to providing heightened transparency with mortgage documents, the Act allows borrowers to nullify a mortgage refinance deal under specific circumstances within three days of closing.
If you have second thoughts about the refinancing deal, you can back out, as long as it’s not with your current mortgage firm. Of course, you should take your time doing your due diligence before signing on the dotted line rather than resorting to rescinding the refinance. But if worse comes to worse, you should know that annulling the deal is an option if absolutely necessary.
5. Not Comparing Quotes From Different Lenders
Perhaps the biggest blunder you can make with a mortgage refinance is failing to shop around to see what various lenders are offering in terms of refinancing rates. Even a fraction of a percentage point can mean thousands of dollars saved over the life of the mortgage. You can think of a lot of better ways to spend that cash other than on interest payments.
Not only does shopping around allow you to find the lowest interest rate, it’ll also give you the opportunity to land ideal terms and conditions for your loan that best suit your financial situation. This applies both with a refinancing and a conventional mortgage.
The Bottom Line
Just like with any issue surrounding your finances, it’s always best to do your homework and find out as much as you can before putting yourself in a position that you can’t get out of. Refinancing is about making the most of your equity and money, so make sure your decision improves your financial situation at the end of the day.