5 Costly Mistakes to Avoid When Refinancing Your Home
It goes without saying that homeowners can save a lot of money by refinancing their home loan especially with the low mortgage interest rates currently available in the market.
Though it’s not all about finding a good interest rate and jumping on to it; there’s still more to it. Refinancing is a great way to get everything back into balance but some mistakes need to be avoided when doing this as discussed below.
1. Not Shopping Around or Consulting Too Many Financial Experts
Not shopping around comes with brand loyalty which could be a drawback when it comes to refinancing. One may have been with the same bank for years, and probably know their account details by heart, but this familiarity can blind you to the competitive opportunities a new bank may hold.
So just like any other investment, it’s crucial to shop around for the best deal. Change is a good thing but most people fear it because of reasons best known to them but at times it’s worth taking the risk just to find out what you have been missing out on.
Consulting too many financial experts and having too many applications with lenders, however, could hurt your rate due to the many inquiries on your credit score. Though it is all important to do your homework and find the best lenders that could give you the best loan options, it is advisable not to seek consultations from too many firms.
So in order to reduce such a risk, but at the same time be certain that your lender is your best option, you might consider trying out the different free tools that could help you get a customized rate e.g. looking for free online mortgage calculators and websites that can estimate your rate.
2. Solely Focusing on the Interest Rates
The biggest mistake borrowers make when comparing lenders is solely focusing on the interest rate unaware that there are a lot of factors that go into mortgage pricing.
For example, closing costs can vary widely from one lender to another, and a seemingly low rate is sometimes used to disguise a loan with unusually high fees since advertised rates are mostly based on the borrower paying for discount points, a way of buying a lower rate.
Which means that a low refinance rate from one lender could actually cost more than a higher rate from someone else due to some hidden fees and costs one may not be aware of.
Therefore, one should inquire about things like:
-The loan application fees
-Prepayment penalties and all other fees before applying for the loan
This will be of great help to know which lender has suitable rates based on your budget.
3. Delaying to Lock on Low Rates
Financial markets can fluctuate in so many unexpected ways and mortgage interest rates may tend to drop over a couple of weeks. Due to this reason, borrowers may believe that these low-interest rates might drop even lower, which they could at times, but they can also increase, hurting one’s monthly installments and making them pay extremely higher amounts of money.
This is such a risky financial decision to make, so it is always advisable to take advantage of the lowest rate currently available in the market and seize it. If it happens that the interest rates fall after you close the deal, you can always refinance; but at least you’ll have locked in a great interest rate, rather than not locking it at all and later facing potentially higher rates.
4. Overvaluing Your Home
Your house value determines the amount and terms of your new loan and since you had originally bought your home, it is most likely to be that your home value has increased. Therefore, you may find a lift in the price of your house but in order to find this complex number, you’ll have to consider several factors, for example:
-Any extra rooms you might have added or
-Any new flooring or carpeting you may have installed
Anyway, the thing with most homeowners is that they assume their home value is much higher because of their personal and emotional attachments to their homes but in the actual market value, that may not be reflected.
So in order to avoid such a risk, you can always contact and seek help from a lender that could assist you by using different formulas to identify what changes actually do to the value of a home. You can also use a licensed appraiser or appraisal service to determine the value of your home, in relation to the neighborhood the house is in and taking into account any changes you may have made.
5. Changing Your Job While Refinancing Your Home
Moving from your current job to another in the middle of your home loan process could affect your loan. This is because lenders always look for low-risk candidates that have a strong financial stability to respond to the monthly installments. So if you happen to switch from one job to another immediately within your same field and get equal or higher pay, you most definitely will not have any problems.
However, in as much as taking a new job does not automatically disqualify you from getting a mortgage loan, the scenarios may be different and you may, in turn, face a difficult time in getting your loan approved. In that case, the best suitable option is to try and delay the change until you get approved.
Refinancing is a great deal to save you money and time because it gives you many options to choose from. Therefore, if it is the best option for you, don’t hesitate to lock on it since you may have better deals e.g. having your lender actually help you pay your closing costs.