When you think of refinancing, you automatically think of saving. It allows you to lower your current interest rate and reduce the loan term. Some refinancing options even allow some cash-out. The goal is to save more money.
While this is true, it is not always that when you refinance you actually save money. Situations vary per borrower. There may be times when situations aren’t suitable for refinancing. And that, instead of saving more money, it actually costs you more than just staying with your current loan.
Here are five blunders which borrowers commit when refinancing. Learn about each one and find out how you can effectively avoid them.
Refinancing always saves you money.
This is not always the case. You immediately rush to refinance after learning that the current interest rate in the market is lower than what you now have. What you fail to see is that aside from the interest rate, there is also the cost of the refinance you need to pay.
Avoid it by: First, comparing your current interest rate with the present market interest rates. Then, calculate the cost of the refinance. This does not have to be paid upfront. Nevertheless, you need to include it to the total cost. Refinancing costsmay include application and origination fees, appraisal and inspection charges, documentation fees and other third-party fees.
After computing all costs plus the new interest, determine if and when you will break even. Only then will you know whether you actually save or not.
Refinancing while having a bad credit score.
Although refinancing may help you afford the loan better by bringing down the interest rate, this may be hard to achieve if you have a bad credit score. In worse cases, you may end up with a loan that is more expensive than the one you currently have.
Why? Your credit score is a big factor that comes into play when you get a loan or when you refinance one. When your scores aren’t as stellar, you may be asked to pay for a larger down payment or be offered a higher interest rate.
Avoid it by: Fixing your credit scores first. How? Examine your credit report and identify where the damage is originating. If you have missed payments, try to keep them current. If you have too many credit cards, consider keeping only the necessary few. In general, conventional loans require a score of 660. If you want to save more, aim for a score higher than that.
Not Shopping for Lenders.
Sure, your current lender may have good refinanceprograms. This does not necessarily mean that you have to stick with them if you wish to refinance. Shopping around and comparing lender to lender will actually do you more good. Yes it can be a little laborsome, but if it’s worth having it’s worth working for.
Avoid it by:Shopping for Lenders. One easy way is by asking a Loan Estimate from each lender. This is a paper document that shows all the necessary information you need to know about the loan. It includes the total money you’ll shell off in the refinance.
Since the Loan Estimate has a standard format, comparing the details is simple. Once you have shortlisted the programs having the best offers, it’s time that you compare it with your current loan. This way, you’ll find one where you can save the most money from.
Not locking in the rate.
When you refinance, you choose not to lock in just yet for the possibility that it may dive further down. The truth is, the rate is always fluctuating. There is no sure way to find out when the rates will go low or when they will shoot up.
Avoid it by: When you already have a rate that you think is affordable enough, don’t hesitate to lock it in. Doing the opposite (which is actually not doing anything) is a gamble. Lock-ins can have a 30-day or a 60-day period. The longer the period, the higher lock-in fee is. This why you also need to consider the fee. It the end, you have to put in mind that a fee is fixed while an adjustable interest rate can be very unpredictable.
Forgetting about the loan term.
Many borrowers fixate on the present interest rates – ‘When it’s low, it’s time to refinance.’ What they forget is that adjusting the loan term may help just as much. When it comes to saving, how short (or how long) a term is can mean a huge difference.
Avoid it by:Try to calculate the projected savings. Compare your present term and the adjusted loan term. A lot of loan website offer an online calculator. But it isn’t so hard to actually do the math. Here’s how:
Current Loan: (monthly payments x no. of months to pay) + (total loan cost)
Minus the New Loan: (new monthly payments x no. of months to pay) + (total refinance cost)
The difference is the projected savings you will have with the new loan term.
Mistakes can provide opportunities for learning. But when it comes to loans, learning from others mistakes is better than actually committing them yourself and suffering the consequences. Refinancing should save you money, not the opposite. Avoid these common refinancing blunders.