Rates are at record lows right now, and it’s a great time to consider refinancing the existing first or second mortgage on your home. But before you rush out to refinance, you need to make sure that you don’t make the common mistakes that many homeowners make when refinancing.
The good news is that you can avoid most of the most common blunders simply by doing your homework and being prepared. Knowledge on refinancing is the best thing you can obtain in the process. By avoiding pitfalls, you can ensure that your desire to refinance is one of the best decisions you have ever made financially.
Here are some of the most common refinancing mistakes:
Overestimating the value of your property. Don’t convince yourself that your house is worth more than you paid for it if that’s not the case. The lender simply won’t lend for more than the appraised value, so don’t kid yourself about what your home is worth.
Miscalculating the break-even point. Typically, you can use a simple calculation to figure out if financing is a good deal. You need to include the difference in the loan term, which greatly affects the break-even point.
Failing to figure in closing costs. As you probably already know, refinancing costs money. You need to ask yourself how much will refinancing cost and how long it will be before you can regain these costs through savings every month.
Believing in “no-cost” refinancing. The costs are simply tacked onto the loan balance, which can extend the term of your loan in the long run.
Ignoring your credit report. Your decisions made in the four to six weeks before refinancing can greatly affect your credit score. You can make a difference in this amount of time in order to get a better rate. You should also check your credit report for any errors.
Failing to shop around. Don’t go with the first lending company that offers you a loan. You won’t know if refinancing will save you money until you shop around for various lenders to see if you can get a good deal.
Delaying the lock of the interest rate. While you float on the interest rate, you are actually taking a risk that the rates will go up. If you wait too long, the rates could get so high that it’s no longer worth it to refinance.
Not checking the paperwork before signing. Don’t assume that there aren’t any mistakes in the paperwork, so read everything in great detail before you sign on the dotted line. This will also help you fully understand the loan terms.
Renovating before getting the property appraised. Even if the finished renovations improve the home’s value, the house will be worth less on appraisal day if it is in shambles at that time.
While you’re planning your refinancing, the Home Loan Advisor can analyze your property, current market conditions, local market comps, and other variables in our proprietary algorithm. We can also match you with potential lenders who have products that may help you and provide you with a sense of stability. The Home Loan Advisor service also features a home value report from Neighborhood IQ that is not only useful, it’s also absolutely free!