Avoiding Mortgage Refinance Missteps
June 17, 2019
If you are thinking about refinancing your mortgage, there are some common mistakes many people make that could help you decide if a refinance really makes sense for you. This list does not include all the possible mistakes, but does highlight some of the most common and avoidable pitfalls.
Your Local Market
One of the first things you will probably want to consider when looking at refinancing is the local real estate market. Without having your credit pulled you can usually get an educated idea of where mortgage rates are, as well as closing costs. This will give you an idea of what a new payment might look like and might be extremely attractive if you’re able to get rid of Private Mortgage Insurance (PMI) in the process. When you are opening new accounts or adding to your debts, you can affect your credit score and increase the refinance mortgage rate. You may need to be even more aware of using credit while in the process of a refinance. You could get tempted into saving $100 on a new TV by opening a 0% interest store credit card, but you may end up paying thousands more on your mortgage refinance because of the change in your debt to income ratio; a major factor in the rate you qualify to receive.
Debt to Income
As I mentioned, your debt to income ratio is a major factor in your rate because it’s significant to your credit score. If you have a low credit score, you will be offered a higher rate mortgage or maybe not qualify at all. Even getting too far in the process without some initial research could cause a hard check of your credit, which will, in the short term, cause a drop in your credit score as a whole. I was surprised to learn that about 20% of credit reports contain incorrect information, according to the FTC (Federal Trade Commission). You may consider checking on the accuracy before making an important decision, which, if you get wrong, could cost you tens of thousands of dollars over the life of your mortgage. On a $250,000 mortgage, just 0.5% difference in interest rate due to your credit score is $75 per month difference, or roughly $27,000 more that you’ll pay over a 30-year loan on the principal and interest. To find and correct errors, you can check out a credit software called Rapid Rescore. You should be able to get this information from your mortgage lender. They could potentially raise your score 100 points in a week if there are errors to correct.
Shopping Could Equal Savings
Refinancing with your current lender without mortgage rate shopping may be an easy decision, but could really cost you. Your current lender already has most of your information to create a refinance and may even be marketing directly to you for a refinance. Mortgage rates can change from day to day so get rate estimates on the same day from multiple lenders; and always be sure to get it in writing. At the same time you get a rate estimate in writing, you’ll also want to make sure you know how long that rate is locked. You can typically lock in a rate for a period of 30, 45, or 60 days.
Look at All Costs
Most people look to save money on a monthly basis as the primary reason for refinancing. But, you could actually end up paying more to refinance in the long run. Consider all refinancing costs included. Some mortgage lenders may offer no closing costs. But, be careful because those closing costs could be incorporated into the monthly payments. You’ll also want to consider how long you plan to stay in your house. If you plan to move soon or are close to paying it off, then a refinance may not make sense. To understand how much less interest you’ll pay the longer you have your mortgage, check out amortization-calc.com. Just put in some basic information and click ‘Calculate.’
Breakeven Point
Since financial reasons are an important factor in your decision, you’ll want to factor your refinance breakeven point. Let’s say that your goal is to save $100 per month by refinancing, and your closing costs are $3,000. Divide $3,000 by $100, which is 30. This means it would take 30 months, or 2 years 6 months, to break even on the refinance. If you plan to stay more than 2.5 years in that house then it may make sense to look at refinancing as an option.
It comes down to this: there’s no black and white or right and wrong way to decide on a refinance. Your best bet is to look at all the factors and keep in mind some of these common mistakes. The final and biggest mistake when refinancing to save money is to then blow the freed-up cash flow on something that sets you behind rather than continuing to push you ahead. Use that extra money to not have to be so extremely budget-conscious in the future. You can always find ways to plan to pay off the mortgage faster so you won’t have to think about refinancing ever again.
By Jeff Mohlman