Many homeowners will save plenty of money in the long run if and when they refinance their mortgages now. This is because interest rates on mortgages are at one of its all-time lows. Beware, however, as low interest rates are not all there is to refinancing your existing mortgage. You should beware of the following mistakes lest you pay more than you are willing and able.
Seizing the First Opportunity
The very first, and probably the worst, mistake you will make is seizing the first
opportunity for mortgage refinancing instead of shopping around. It just makes you want to shake your head especially as shaving a few decimal points off the interest rate means thousands of dollars saved on the new mortgage contract.
Focusing On the Interest Rate with Blinders On
However, interest rates on the mortgage are not the be-all and end-all of mortgage refinance. You have to look at the other fees of the scheme, which can include but are definitely not limited to closing fees, origination fees, credit report charges and other fees that will accrue before the ink on the mortgage paper dries up.
Passing Over the Good Faith Estimate
The Good faith Estimate is simply the breakdown of the mortgage refinancing total costs, from the interest rate to the closing fees and everything else in between. Although you will not be provided with the Good Faith Estimate until the deal is almost finalized, you still have to check it over and determine if the costs matches up with what you were told during the initial application process. If you think that it varies widely, it is a safer option to go elsewhere because it will only be the beginning of hidden costs tacked into your amortization.
Failing to Calculate the Break-Even Point
The break-even point is the exact date when the costs of refinancing equals the money saved on the refinance. For example, if you spent a total of $2,000 to refinance your mortgage and you will save $100 on the new monthly amortization, then your break-even point is at 20 months. Now, if you intend to refinance or sell your home in less than 20 months, forget about it. You will only lose money and time.
Cashing Out on Excessive Home Equity
The process of refinancing your mortgage provides for the opportunity to borrow cash against your home equity for various purposes like home repairs, small investments and major purchases. This is just fine, of course. However, you should never take too much out of your home equity lest you expose yourself to high risks when housing prices significantly fall, which it has in the recession. As much as possible, be very conservative when dipping into your home equity.
There are other mistakes to refinancing your mortgage such as opting for a longer loan period, agreeing to prepayment charges, and paying junk fees but the abovementioned mistakes are the ones that you should avoid the most.
If this is your first mortgage refinance, it is often better to hire a mortgage broker to handle the comparison shopping, discuss the options and provide for good advice on the matter. This way, you can avoid most, if not all, of the mistakes of mortgage refinance.
By Adam Gardner