Homeowners who are considering refinancing need to take the right steps to make sure they don't lose out financially during the process.
Eight refinancing mistakes
1.Not shopping for mortgage quotes. Regardless of your goals for refinancing, a quick check of your current mortgage terms and current mortgage rates is essential before consulting a lender. If mortgage rates have risen above your current interest rate, you may not want to spend the time and money on refinancing unless you specifically want to shorten your mortgage term or switch from one loan type to another.
2.Not checking your credit. Check your credit before you apply for a new loan to look for errors and to see if you need to take steps to improve your credit score. The lowest mortgage rates are reserved for borrowers with credit scores above 740.
3.Not estimating your home's value. Another important element to the refinancing process is your home's value. (Many lenders require a minimum of 10 percent in home equity or more. If you have less than 20 percent in home equity, you'll have to pay private mortgage insurance which could make your mortgage payments too high.
4.Not shopping for lower fees. While interest rates are important, the cost of your refinance should also be part of the equation when estimating the value of a refinance.
5.Ignoring the big picture. If you're focused on saving money, you may be assuming that refinancing into a new 30-year mortgage makes the most sense. Before you sign on for a new mortgage loan, check on the amount of interest you'll pay over the life of the loan. You may have lower monthly payments but you're likely adding thousands of dollars in interest payments onto your loan.
6.Not communicating with your lender. Refinancing requires applying for an entirely new loan, so make sure you and your lender are in constant communication from the moment you apply for a refinance until settlement. Your lender may need extra documentation from you and a slow response could delay your closing.
7.Not evaluating other loan terms. Before you decide on replacing your 30-year loan with another 30-year loan, ask your lender to compare monthly payments on a 25-, 20-, 15- or even 10-year loan to see if the payments would be affordable. Shortening your loan term can save you thousands in interest and allow you to own your home free and clear much earlier.
8.Delaying your rate lock. Once you've decided on your new mortgage you may be tempted to play the game of locking in your loan at the lowest possible interest rate. The problem is that for the sake of saving a few dollars' difference in your mortgage payment each month you could end up with a higher mortgage rate. Your lender can help you determine the best day to lock in your rate.
Refinancing can provide plenty of financial benefits when done correctly, but homeowners need to make sure they do their research and follow through to achieve the best possible home refinance.