Is your mortgage underwater? Does a mortgage refinance sound like a great idea to get back on track with your money?
Done properly, a refinance will save you money on the long run and help you free up some more cash each month. This is why many borrowers do take it into account.
Here are some mortgage refinance mistakes you do need to avoid, though:
Not doing some basic research
Before you start contacting lenders, you should find out your credit score and also get an idea of how much your home is currently worth.
Sure, it’s not that easy to get an exact figure, but, by using a home-valuation site (zillow comes to mind) or by talking to a realtor, you’ll get a pretty clear image of this number.
Trying to refinance with a low credit score
Whenever you need to borrow money, bad credit will limit the chances to get a good financing deal. This means bigger interest rates, more fees, bigger monthly payments etc.
Not to mention some lenders don’t work with potential customers with low credit score.
So, before you look into refinancing, try to repair your bad credit. It will make a huge difference.
Over-estimating the value of your home
Home prices dropped in the past years (at least in some markets), so it’s normal for your home to have lost value. Just because it was worth $250,000 10 years ago, it doesn’t mean its price is the same.
Get an accurate appraisal so that you know what to expect.
Failing to lock in low rates
Mortgage interest rates have dropped, but many borrowers expect them to keep on getting lower. While it’s a good idea not to rush into making any important decisions, not doing anything and expecting some ideal rates will lose you money.
Why not settle for a good interest rate and refinance?
If the interest rates fall significantly afterwards, you can refinance, but you’ll be taking advantage of a great interest rate in the meantime.
Focusing only on the interest rate
Many lenders advertise great interest rates, only to ‘hide’ other costs that are significantly higher. Always remember the lender is in the business to make money, so don’t fall for the ‘too good to be true’ ads.
Look at the fees, the loan terms, everything that might get you in trouble.
Failing to read the documentation
It’s still amazing to me how people can get into 10-30 years of debt and not read the ‘fine print’.
Whenever you prepare to sign a document, READ IT thoroughly. Get a lawyer, if you have one, to take a look. A mortgage or a refinance is serious stuff, don’t treat it lightly.
Running more debt before applying
Fancy a car loan? Maybe some new credit cards?
It might be a good idea to stay away from anything that will affect your credit score. It’s already been proven than bad credit is … bad for you, so, if you want to get the chance of a decent mortgage refinance deal, keep your credit score in the best shape you can.
Not shopping around for better deals
In many cases, your current lender might try to lure you in with some mortgage refinancing deals.
Don’t choose their offers just because it’s convenient (remember, in many cases convenience can get costly).
Shop around. Look at other lenders, study all their offers, crunch the numbers once again and then choose the best deal. You don’t have a moral obligation towards your current lender, so choose what’s better for your wallet.
Choosing the wrong loan term
In many cases borrowers look for a great interest rate. You can also change the term of your loan, since you have various options, including 15, 20 or 30 years repayment plans.
Longer terms might be more ‘affordable’ on a monthly basis (since you pay less), but are costly long-term. So many finance experts advise for a shorter term, especially if you can make those payments.