Considering a home refinance? It's a wise idea that can help you save money, get a better interest rate and even pull some cash out. But before you get started, make sure you avoid these common home refinancing mistakes.
Mistake #1: Being Unrealistic About The Value
When the housing bubble burst, lenders had to rethink every aspect of mortgages. What's more, millions of people owed more than their home was worth. This took years to resolve and there is still runoff occurring. One of the most common home refinancing mistakes made is overestimating the value of your home.
Most lenders want you have to at least 20% in equity before they will approve a refinance. You can use some online resources to get an idea of what your home is worth, but the lender will base their decision on what the appraiser says. You should consider getting your home valued using a third-party appraiser, too, so you can determine if it's even worth a consideration to refinance before you start digging into the piles of paperwork that are required.
Mistake #2: Not Shopping Around
Never choose the first lender you find, even if you have used them before or a friend has. The truth is that all lenders have something to offer, and one may have a better deal who is just a click or a phone call away. Just half a point saved on your interest rate, for example, can save you tens of thousands of dollars over the course of the loan.
For instance, if you refinanced a $250k at 4.25% interest, you'd pay about $1,230 per month. But that same loan locked in at 4% could save you $13,000 or more on interest fees over the course of the loan, certainly not chump change by any means, and cost you about $1,194 per month.
Mistake #3: Choosing the Wrong Loan Term
Many times, homeowners choose to refinance to get a better interest rate. But you can also change the term of the loan, too. You usually have several options including 15, 20 and 30-year repayment plans. But you need to know which one is best suited for your needs beforehand.
Longer loan terms cost you more in interest but have a lower monthly payment. Shorter terms have much higher payments but cost you less in interest rates. Spend some time crunching the numbers online beforehand, so you can determine which move is the best one for your needs.
Mistake #4: Waiting to Lock In a Rate
Don't make the mistake of holding out to get a better rate. These fluctuate all the time. If you can lock in your rate on the loan, do it. You can always rescind the loan later if you think you can save a heap of cash. But a locked in rate guarantees that you will get that rate no matter how long the closing process is (typically they have a 30-day window). This can mean the difference in a substantial amount of money when all is said and done.
Mistake #5: Forgetting About Closing Costs
Closing costs can be steep. You may have to pay out a few thousand dollars once the loan is ready to close. This includes fees like the application fee, appraisal fees, title fees and even attorney fees. Ask in advance about these so there are no surprises come signing. You may also have a zero closing cost option, something that you can inquire about with your particular lender.