With mortgage rates still at a lower rate than 10 years ago, you may feel the pressure to refinance before the rates shoot back up. Saving money on mortgage payments is one of the most common reasons why you may want to refinance, but the process is more complicated than you think.
Here we give you some of the most common mistakes when refinancing a mortgage. Find out what they are and avoid making them.
Not doing your homework
A mortgage refinance is considered a new loan, so it is important to do your homework before contacting lenders and applying for a refinance. One of the first things you should check is your credit score. You are entitled to a free credit report from Experian, TransUnion and Equifax once a year. By finding out your credit score beforehand, you know which rates you may qualify for. If your score isn’t good enough yet, you can work on repairing it before refinancing your mortgage.
Focusing only on the interest rate
Lenders flash low-interest rates in the hopes of luring you into refinancing with them. Although low interest rates are indeed great, it is not the only deciding factor. When comparing lenders, also consider other fees they may add into your loan such as originations fees, refinance charges, credit report fees, and etc. If they say you can take advantage of “no cost” refinancing, most probably these costs will be rolled into the loan by increasing the interest rate.
Overlooking the new mortgage term
If you are currently having problems with your finances, it is easy to get attracted to a refinancing that allows much lower monthly mortgage payments. When taking offers from lenders, do not overlook the new mortgage term. If you only have 10 years left on your 30-year mortgage, if would be a mistake to reset to a 15-year mortgage just to get lower monthly payments. Look for other options. One thing you can do is repair your credit before applying for refinancing. You will get a better deal this way.
Ignoring the closing costs
Closing costs, along with other fees are cleverly hidden by lenders preying on borrowers looking desperate to refinance. Take a closer look at the fees listed in the Good Faith Estimates. If there are fees that don’t make sense, do not hesitate to ask your lender for an explanation. If you are not satisfied with the answer, you can always turn around and look for more honest lenders.
The Bottomline: Be a Wise Borrower
At the end of the day, the signature will come from you. You will decide whether to trust a lender with an important financial decision. If you want to be sure, start by narrowing down your search to lenders who meet your needs. Click on the orange button below. After a few clicks, you will be on your way to getting matched with a lender who may lead you to better mortgage terms through refinancing.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.