4 Most Common Mistakes When Refinancing
While refinancing a mortgage holds its appeal and can be beneficial, there are still some mistakes that homeowners tend to make. From choosing the wrong company to refinancing too much, it will end up costing them more instead.
The good news is that these mistakes are avoidable, especially if you know what to watch out for. Here they are:
1. Choosing the wrong lender
Perhaps the single most common mistakes homeowners make when they are looking to refinance their mortgage is choosing the wrong lender. It sounds simple, but this mistake can cost you a lot in the long run.
The Consumer Financial Protection Bureau (CFPB) found that 47% of mortgage applicants do not shop around when finding a home loan.
A lot of people also simply stick with their current lender when refinancing. It is easy to think that your first lender is the one who can give you the best offer, but this isn’t necessarily true.
You might also want to know that you will still need to apply for a refinance with them. Plus, there are even certain lenders who will purposefully exploit their customer’s loyalty and charge a much larger fee.
With that said, comparing multiple lenders and companies to find the perfect refinance offer for you can give you some advantages.
Look into wholesale interest rates and ask if your lender offers it, as this may give you the lowest interest rate.
2. Focusing only on mortgage rates
Another popular mistake is that even when borrowers shop around, they tend to focus only on the interest rate. But remember that rates are not the only factor that can affect the costs of your refinance.
Mortgage pricing consists of other elements too, and a higher rate from one lender may save you some money in the long term compared to someone offering a lower rate.
How so? First off, closing costs can range quite a lot among lenders. For example, a deal may seem enticing because it gives you the lowest refinance rate possible. But the fees for refinancing your loan may be ridiculously high, or you’re then required to purchase discount points to get that lower rate.
Our best tip is to be as thorough as you can in your research. Ask about the origination fees, points, closing costs, and other details. Remember that none of the fees can be finalized until you get your Good Faith Estimate.
3. Not “taking out” enough cash
When it comes to cash-out refinancing, you would know that this type of refinancing typically comes with a higher rate as it allows you to take out cash from your home equity.
This is a great option for those looking to achieve more urgent financial goals, such as paying off high-interest debt or making necessary home renovations.
On the other hand, it may not be a good idea to use a cash-out refinance if you only want to take out a small amount of cash.
If what you need is only a bit of cash, there’s no need to trade that for a higher interest rate and closing fees, which will only cost you more overall. Instead, we would recommend going for a more creative approach to structuring your loan.
For instance, you can take $2,000 back on a rate and term refinance. This may be a better alternative for you!
4. Refinancing too often
Finally, a big mistake when refinancing that we would like to address is doing it too often. When the mortgage rate environment hits an all-time low, there is usually no shortage of homeowners hurrying to refinance and get the lowest rate they can. Yes, even those who have already refinanced their loan.
The problem is that refinancing too often may end up hurting you more than benefits you. That is because a mortgage refinances costs money as well as time. The fees usually amount to around 3% and up to 6% of your loan amount for each refinance, which will add up the more times you do it.
Unfortunately, some people make the mistake of constantly hunting for the lowest rates and refinancing too many times. The closing costs will mount high over time and make the process of refinancing a pointless one.
So, these are the top 4 mistakes that homeowners typically make when trying to refinance their mortgage. We hope reading it can keep you from making the same mistakes!