6 Red Flags to Avoid When Refinancing Your Mortgage in the U.S. This Year

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Mortgage interest rates for refinancing in 2018 are not as low as in the past, but you still may be able to refinance into a lower rate in some cases. If you can get a rate that is .5% or more below where you are now, it may be worth pulling the trigger on a refinance this year. But there are some classic red flag issues to avoid when you refinance your mortgage right now. This article highlights the most important ones to watch for.

#1 Not Shopping Enough

When you are considering a refinance, you may be tempted by the first rate that you see if it is lower than what you have now. This is often a mistake. Far too many home owners just go to their bank or current lender when they need to refinance. Or, they may just look at a few advertised rates and pick a lender offering a low rate.

It will always pay to shop for your next mortgage. A difference of 1/8 of a point does not sound like much, but that payment that is $25 lower per month adds up to thousands of saved interest charges over the years. Some lenders may offer lower rates for very similar loan programs. The reason is that different lenders have different investors looking for different risk and different rates of return. So it is always good to get several mortgage loan quotes.

#2 Just Looking At Rate

Everyone wants a low rate, but there is more to consider. A lot of factors enter into pricing a mortgage, and that low rate you see may not work out in the end the way you think. For example, the super low rates you see advertised usually are for people with the best credit scores. You may discover that your rate is considerably higher, but after you have started down the approval path, you may not want to back out of the deal.

Also, closing costs vary widely from lender to lender. A low rate you see in an advertisement may trick you somewhat because it comes with higher fees than other loans. Still another trick is to advertise a low rate by assuming the borrower is paying for discount points to get that low rate. As you shop for your refinance mortgage, ask the lender about loan origination fees, points, credit report fees, etc. None of these costs of the mortgage are final until you get your Good Faith Estimate after you apply.

#3 Not Getting a Low Enough Rate

Some people refinance for a new rate that is too small to make a major difference in payment. Sure, saving $40 per month on your payment is fine, but it will take you years to recover thousands in closing costs you paid. It is important to determine what the break even point is for the new loan.

For instance, if you pay $5000 in closing costs and you are saving $100 per month on your payment, your break even point is 50 months. That is more than four years. But if you are only saving $50 per month, your break even point is a full eight years. If you sell the home before then, you have essentially lost money. Many experts say you need to reduce your rate paid by at least .75% to make a difference enough to be worth refinancing.

#4 Timing Rates for Mortgage Refinancing

When rates are low, borrowers may be watching rates every day for refinancing. They want to jump into the market and lock their rate when they are as low as possible. But even experts cannot predict what mortgage interest rates will do with any certainty from day to day or week to week. Timing rates is like trying to time the stock market. Even seasoned professionals usually are wrong.

As of 2018, we still have historically low rates, but they are on the rise. It is likely rates will continue to edge higher, but this is not certain.

#5 Refinancing Your Mortgage Too Much

People always want to save money, and you can sometimes do that with interest rates low and falling. But remember that every refinance costs you money. To refinance you may pay up to 5% of the balance of the loan. Some home owners can make a costly mistake in chasing low rates and refinance too much.

#6 Stretching Out the Loan

It is tempting to refinance and save yourself money over the short term. But remember you are starting your mortgage over again every time you refinance. Some experts recommend refinancing into a shorter term loan. If you have been paying on your 30 year loan for 10 years, you might benefit from refinancing into a 20 year or 15 year mortgage. You will have a higher payment, but you will pay a lower rate, and you will pay off the loan years faster.

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.

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