In the 4th quarter of 2017, interest rates are still in the low 4% range according to Zillow. This makes mortgage refinancing still a tantalizing and appealing possibility for many Americans.
Don’t call your mortgage broker just yet, however. Did you know that many homeowners make silly mistakes when home refinancing that cost them big bucks in both the short and long term?
Here are 8 of the biggest mortgage refinancing mistakes you do not want to make:
#1 You Didn’t Do Your Homework
Before you call lenders, you need to conduct some basic research and due diligence. Let’s start with your credit score. Know what it is? Your score may have dropped since you got your mortgage (especially if you ran up credit card debt or have missed some payments). Getting your credit score immediately will tell you what you can expect regarding refinance rates.
Next, check what your home is likely worth. You can check Redfin and Zillow, but your best bet is to get a basic analysis of its value from your real estate agent.
With these critical pieces of information, you can then look at current refinance-mortgage rates, use a refi calculator and have a basic idea of what your new rate and payment might be.
At this point, you are in a good position to start calling mortgage lenders.
#2 You Ran Up Debt
Lenders will always check your credit if you are doing a mortgage refinance, and they will check it again before closing.
The worst thing you can do during that time is to open up new credit cards and run up debt. More than a few refinances have been torpedoed by consumers running up $10,000 of credit card debt during the refinance process.
Some people will get suckered into opening a store credit card to save $50 on buying a television. Then they pay .5% higher on their mortgage and cost themselves thousands.
#3 You Have a Low FICO
Your refinance options dwindle as your credit score drops. A standard, conventional refinance will require you to have at least 660 FICO to get approved, albeit at a higher interest rate. If you have an FHA -insured mortgage, all lenders will talk to you if you have a 640 or higher. But if your credit is 639, only 25% of lenders will work with you. See if you meet the requirements for FHA loans with poor credit scores.
In the year before you refinance, it pays heavily to be very careful with your credit score. Get credit cards paid off, pay your mortgage, and don’t have any late payments on your house whatever you do. Talk to some of the associated lending companies about how to get approved for a mortgage with bad credit.
#4 Mortgage Refinancing with Your Lender
It is super easy to just refinance with your current mortgage lender, call it a day and move on.
That’s a mistake. If you fail to compare interest rates among several lenders, this can cost you a lot in the long run.
We strongly advise that you check with at least three lenders to see what the best rates are for your profile. You should check with a mortgage broker, credit union and a bank. Also closely check what the fees and closing costs are and factor those into your financial decision.
When shopping mortgage-refinance lenders, always get every quote you ask for in writing and see how long it is valid for.
#5 Not Considering the Costs
Everyone wants to drop their monthly payment on their mortgage. But that is not the whole ballgame.
Before starting to look at refinancing, you should check your mortgage documents to ensure that the loan does not have a prepayment penalty. You don’t want to get whacked with a penalty if you pay off the loan to refinance.
Also look very carefully at every fee and charge and closing cost the lender is going to charge you.
Some lenders will say you have no closing costs. This just means you are getting charged a higher rate for the pleasure of having no out of pocket closing costs. This is ok, but you have to be aware of it and run the numbers to see if it makes financial sense.
#6 Ignoring the Ratios
If you need to borrow $80,000 and your home’s value is $100,000, your LTV is 80%. This does not stop you from doing your refi, but you will need to pay for mortgage insurance. This will cost you a percentage of your monthly mortgage payment, usually in the range of $50 to $150 per month.
#7 Failing to Lock in Rates When Refinancing
Interest rates are low, but they are generally rising; the Federal Reserve raised rates in December 2016, and has promised at least two more increases in 2017. Those increases that were promised have already been priced into mortgage rates. But if the Fed acts unexpectedly, rates could spike.
You should lock in your rate for at least 30 days once you have an approval on a home-loan refinance. This is really not the time to allow the interest rate to float. If the market starts to decline, this could change though. If you are seeking a lock on a refinance mortgage with bad credit, you may want to select a 45 or 60-day lock because it could take longer to close.
#8 Things Go Wrong
Many refinances are fairly easy if you have good credit, complete income and asset documentation and steady employment. Less than this perfect profile, things can go wrong during the mortgage refinance process.
The appraisal could come in low, which would require the financing to be changed, increasing your costs. Or perhaps someone loses a job or there is a financial emergency. For some people, a refinance could take 3 months, or even fall through. It’s just a smart move to be prepared for the unexpected.
Getting your mortgage refinanced is a great thing most of the time, but be ready for something to go wrong. That way, you will be prepared if something happens that you did not expect, and you may be able to rescue the deal.