Interest rates are expected to remain low for the rest of 2016. This has encouraged many individuals to make the transition into homeownership. With the time ripe for taking out that first mortgage, the current trend could also be an opportunity to refinance an existing one.
There are a few good reasons for mortgage refinancing. You can do it to reduce your loan term or the monthly interest rate. Now, it’s one thing to have an objective for getting a refinance loan. It’s quite another matter to be prepared for it. Unfortunately, most people go see a lender without bothering to take steps to improve their credit rating or having all the necessary documents on hand.
Part of preparedness is doing research. Apart from finding out what types of loans you can qualify for, it’s also best to identify the pitfalls that you can possibly encounter. Here are some common ones you should watch out for.
Overestimating the value of your home
The house you currently live in might be worth $200,000 five years ago, but this doesn’t mean it’s worth more now. Remember that the quality of your home affects its market value. If your property has not been well kept throughout the years, you could a receive refinance offer that’s higher than what you expected.
Overlooking loans with a shorter term
If you don’t intend to live in the house for at least ten years, skip those hybrid loans that are fixed for five or seven years before converting into a 1-year adjustable rate mortgage (ARM). With interest rates really low these days, going for a 15-year fixed rate loan would be a better alternative.
Not locking in rates
With mortgage rates down to record lows, borrowers have this thinking that they can get them even lower. They could but waiting is risky. Despite projections that interest rates are likely to remain low until the end of the year, the market remains volatile. Might as well lock in a great interest rate now. If mortgage rates fall further after you close, you can always have that loan refinanced.
Not having enough knowledge of the documents needed to refinance
Most people get that supplying supporting documents is a must when refinancing an existing mortgage. However, few take the time to actually read and understand them, let alone read and understand the lender’s proposal. In some cases, there might be up to 80 pages of them. If you don’t carefully read through each one, you won’t be able to be aware or comprehend the terms and conditions.
Being aware of these potential pitfalls means you now know what should be done to avoid them. When you’re fully prepared to have a refi, the process tends to go faster and smoother.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.