A refinance can be a great way to accomplish some of your longstanding financial goals. However, it’s essential to know how to avoid potential issues that can cost you and exactly what you are getting into financially.
When looking to refinance, it is vital to know the process and common pitfalls and best avoid them. Here are some key points to keep in mind.
Only focusing on the rate
Different factors go into determining mortgage interest rates. One of those factors is mortgage points. A lender may offer lower rates to beat or match a competing offer.
However, the bank may charge more in mortgage points to make the loan happen. Credit scores are also significant factors in determining the rate.
Individuals planning to refinance may want to improve credit scores before applying.
Not comparing and shopping around enough loans
To ensure you are getting the lowest interest rate that you qualify for, it is crucial to compare rates from multiple lenders and take your time to shop around.
Even when using a loan broker, they are sometimes limited to specific lenders. When refinancing or purchasing a new home, compare different companies and loan services, including points’ worth, rates, and costs.
Cashing out for wrong reasons
Refinancing with a cash-out refinance allows homeowners the chance to gain access to some of the home’s equity in the form of cash. Homeowners can use this money to buy a divorced spouse out of their stake in a home, consolidate debt, make renovations, or other purposes.
However, cash-outs should not be used for frivolous or unnecessary purchases as they could prove a financial speed bump in the future.
Refinancers should also keep in mind that they’ll be limited in the amount that can be taken in a cash-out. Interested individuals should check with lenders to ensure the refinance can help with current problems.
Not correctly determining your break-even point
If you consider refinancing for a lower interest rate, you must determine your “break-even point.”
Determining how long you are planning to remain in the home is key to deciding whether or not to pursue a refinance. You must know what out-of-pocket costs will be, especially if paying closing costs.
It would be best if you weighed the costs of a lower interest rate and closing costs compared to how long you plan to stay in the home. If you are not planning on remaining in the house for long, refinancing may cost you money instead of saving it.
Not checking all of the costs of the loan
By refinancing an existing mortgage loan, a new loan is created. You must then consider closing costs. Closing costs when refinancing, in general, can range from 2 to 6 percent of the loan amount.
You can choose to pay closing costs by rolling them into a new loan or paying them out of pocket. If you are short on cash, keep in mind that you’ll be paying interest on the new amount for years to come.
Timing mortgage rates incorrectly
If you are holding off on refinancing because you want to wait until rates drop lower, you may regret it. You could miss out on a good deal if rates increase instead of decrease.
Trying to time our interest rates is like gauging the stock market. If you decide that the reasons for refinancing outweigh the cons, make a move.
Extending the length of your mortgage
If you have been making payments on your mortgage for a certain amount of time, it may make more sense to refinance for the amount of time remaining on your current mortgage instead of refinancing for a 30-year loan.
If you refinance for a longer repayment term, it will likely cost you more money in interest charges because you’ll be making payments for additional years.
