Interest rates are still at historic lows and refinancing could save homeowners a bundle. Trouble is many homeowners aren’t refinancing because the process can be a bit tricky. Here are some refinancing mistakes to avoid.
Before starting the refinancing process it’s a good idea to know your credit score. Job loss and a tough economy have taken a beating on many homeowner’s credit scores. Seeking a way out of debt, many homeowners attempt to refinance only to receive refinancing offers that were actually worse than their existing mortgage and in extreme cases were rejected by lenders all together. To improve your credit score in the months before you refinance, don’t make big purchases like a car or a boat, pay down your credit cards and check your credit report for errors, like debts you’ve already paid off.
In addition to knowing your credit score and taking steps to ensure you have a good score in order to secure a better rate, it’s also good to know the value of your home. Over the last five years housing prices declined across much of the country. While they’ve rebounded recently, many home owners don’t have a realistic idea of their home’s value. Your home may not command the top dollar it may have garnished in 2007. This is why it’s a good idea to research home prices in your neighborhood before working with a lender on refinancing.
When it comes to refinancing your mortgage, it’s also important to keep in mind that the interest rate isn’t everything. There are other components to a home loan that deserve your attention. If you only have a few years left on your current mortgage, refinancing for a lower rate on a 20- or 30- year loan doesn’t make sense. While you may lower your monthly payment, you’ll spend much more in interest over the life of the new loan. You’ll also want to be on the lookout for new loans with restrictive terms like high penalties on late or early payments. Consider all the factors, not just the interest rate, before signing the dotted line.
And there’s no such thing as a free lunch either. Refinancing costs such as legal fees, the home appraisal and credit checks can quickly add up to thousands of dollars. It’s up to you to determine how long it will take to break even — for your total monthly savings to be more than the closing costs. A refinance that lowers your rate by half a percent will take a longer time for you to break even. And beware of refinancing that doesn’t have any closing costs because those loans often come with higher interest rates and strings attached.
If you plan to stay in your home for a while, one thing you should avoid when it comes to refinancing is an adjustable rate mortgage (ARM). ARMs have rates that can shoot up sharply and quickly which is why they’re a big gamble. For most families, a home is a long-term investment and locking in to a fixed-rate mortgage with a low rate is ideal because it can save them money in the long run. However, if you are a military family or your job is one that has you moving on a constant basis, you could benefit from the initial lower interest rate that’s offered on many ARMs provided you move and sell your house before the interest rate increase kicks in.
By avoiding these refinancing mistakes and working with a reputable mortgage lender like Homestead, you’ll be on the road to keeping more money in your pocket for the long haul.