Updated by Craig Berry
Mortgage rates fell dramatically last month. Since then, rates have started to trend slightly upward. Even so, according to Freddie Mac's latest report, 30-year fixed rate mortgages are still incredibly low, especially as compared to just a few months ago, in November 2018, when 30-year mortgage rates were averaging nearly 5%.
When mortgage rates are low, many homeowners find themselves considering the possibility of refinancing their mortgage to obtain a lower rate.
8 common mortgage refinance mistakes
Prior to making the decision to refinance, it helps to understand some of the most common mortgage refinance mistakes. Doing so can ensure you get the savings and benefits desired.
1: Failing to do your real estate homework
Get a general idea of your home's worth by checking home-valuation sites and speaking to your local real estate expert.
According to Allison Barnett of the Barnett Realty Group in Marietta, GA, "You should always strive to get a real-time market analysis from a local real estate professional." While home-valuation sites like Zillow can give you a very broad range, says Barnett, they also state that 'Zestimates' may carry a margin of error that's nearly 8% depending on your location.
You can get an educated idea of the mortgage rate, closing costs and new payment without having anybody pull your credit.
Armed with the appropriate information, you can visit HSH.com to view advertised mortgage rates from various lenders. Then, use a refinance calculator to estimate your new monthly mortgage payment.
2: Opening new credit accounts and running up debt
Lenders check your credit when you apply for a refinance, and most check it again just before settlement.
Making major purchases on credit or applying for new credit could lead to delays in the approval process. In the worst case, you could end up being declined a mortgage refinance loan.
Every time you open a new credit account, your credit score can drop. Lower credit scores translate into higher mortgage rates.
While it's a difficult to estimate the number of points you can lose due to newly-opened accounts and inquiries versus missed payments and maxed-out cards, a FICO study shows that, on average, people with the best credit scores (upper 700s) have not opened a new account in more than two years.
The bottom line? Just because you may save $100 on a new TV by opening that store credit card, you may also end up paying thousands more on your mortgage refinance.
3: Having a low credit score
Most lenders have minimum credit score guidelines. Even though you may heard that you can get an FHA loan with a credit score as low as 500, most lenders have their own set of "overlays." These overlays can be whatever that particular lender or bank chooses.
Before you start a refinance, order your credit reports from Equifax, TransUnion and Experian. Consumers, by law, are entitled to one free credit report per year from each major bureau.
This is important because, according to the Federal Trade Commission (FTC), 20 percent of credit reports contain wrong information. Five percent of those errors may result in the consumer receiving a much higher mortgage interest rate.
Immediately report any errors. The bureau is required to remove any error or trade line it can't prove is yours.
How much does your credit score impact your ability to refinance? A lot actually.
Let's say you have a 620 credit score and you're applying for a conventional loan. The difference between someone with a 620 score vs a 740 score could impact the interest rate by a full half point, maybe higher.
As an illustration, here's how a half point interest rate difference could look based on a loan amount of $250,000 on a 30-year fixed mortgage.
- 620 score at 5% = $1,342 (Principal and Interest)
- 740 score at 4.5% = $1,267 (Principal and Interest)
In this scenario, that's a difference of $75 per month. That could be the difference in whether it would make sense for you to consider a refinance.
So does that mean that all hope is lost or that you shouldn't refinance? No.
Purging errors with a credit software program called Rapid Rescore can raise your credit score by as much as 100 points in less than a week. Ask you mortgage lender about this program.
4: Refinancing with your current lender without mortgage rate shopping
It can be convenient to simply refinance with your current lender. After all, they already have most of your information.
Why should you shop around for your mortgage refinance? Failing to compare rates can be costly over the long run.
For example, a common misconception is that your current lender is automatically going to give you a special deal or discount. Instead, be sure to compare your lender's quote with others. You may find other lenders who can offer a considerably lower rate as compared to what your current lender offers for a refinance.
Important note: Be sure to check with various lenders on the same day because mortgage rates can vary from day to day. Get all quotes in writing.
In addition to the interest rate, in order to make sure you're comparing apples to apples, compare the fees lenders charge for making the loan.
5: Forgetting to consider all mortgage refinance costs
Do you end up paying more when you refinance? If you aren't careful - - yes.
Lowering your monthly payment is a key goal for most homeowners looking to refinance. But it should not be the only consideration.
Look at all fees when comparing refinance offers. Run the numbers on different scenarios by changing the loan amount, and looking at the cost with and without upfront points.
Some mortgage lenders may offer no closing costs on refinancing to existing customers. But be on guard: Find out if the closing costs are being incorporated into the monthly mortgage payments.
You should carefully consider the amount of time you plan to stay in your house. If your goal is to move soon, or you're close to paying it off, a refinance may not make sense.
6: Not factoring your refinance breakeven point
Don't forget to calculate your breakeven point to see whether refinancing is truly worthwhile.
For example, let's say you're refinancing your mortgage with the goal of saving $100 per month, and your closing costs are $4000.
To calculate your refinance breakeven point, you'd divide $4,000 by $100 and you'll get 40. That means it would take 40 months (three years and three months) before you'll break even.
That's fine unless you don't expect to be in the home at least that long. But if you might be moving sooner than that, refinancing might not bewise.
7: Not locking in mortgage rates
Since mortgage rates can change often, make sure you and your lender are clear about when your rate is to be locked. Most mortgage rate locks are for 30, 45 or 60 days.
While some homeowners may be optimistic that mortgage rates may dip again, it's all but gambling really. Rates could drop, but waiting could also backfire on you and leave you saving less money, or make refinancing no longer beneficial.
It can take time to get a refinance approved, so be sure to submit the required documentation as soon as possible. If you drag your feet, you might have to pay a fee to extend the rate lock.
8: Overlooking the possibility that things could go wrong
The refinance process can be relatively straightforward for homeowners with great credit, strong equity positions, full income and asset documentation, and long-standing employment. However, due to new rules and regulations, as well as the fact that not every homeowner fits the perfect mold, the refinance process can be bumpy for some.
If you haven't purchased a home or refinanced recently, you may be surprised by some of the new requirements most lenders have in place.
Since 2009, there has been a considerable amount of regulation for banks and lenders in order to prevent a repeat of the housing crisis. The rules were created by the Consumer Finance Protection Bureau (CFPB) and were mandated under the Dodd-Frank Act to ban many of the loose practices during the housing bubble.
Refinancing isn't the right move for everyone. However, it could also be a way to free up cash flow, pay down your mortgage quicker, get rid of PMI, and a number of other benefits.
Any major financial decision requires preparation -- and refinancing a home is no different. Educating yourself ahead of time can help you avoid common mortgage refinance mistakes, and feel confident about making an informed decision.
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