My wife and I bought a house last year and refinanced the mortgage within a year of the purchase. Most people don’t plan to refinance within a year of their purchase, but the mortgage rates continued falling to the point where it seemed like a good long term move. We actually could have saved even more money by waiting a few months longer, as we are continuing to see record low mortgage rates.
If you have a mortgage that is over a year old, chances are very good that you will be able to save money by refinancing your mortgage. But take a some time to research your options before you apply for a new loan – and make sure you avoid these mistakes!
Mortgage Refinance Mistakes
1. Be careful not to overestimate the value of your home. Home prices still haven’t fully stabilized in some areas of the country. You may not have as many refinancing options if you are underwater in your home, or you may need to apply for a special refinancing program, such as the Making Home Affordable program. Lower home prices may also erase some of your equity, meaning you may need to bring extra cash to the table to avoid PMI, or you may need to take out an 80-10-10 mortgage or other financing option.
2. Don’t focus only on the interest rates. Not all loans are created equally. Be sure to compare the offers from each lender on a term by term basis, keeping in mind that all lenders charge varying fees and closing costs. Be sure to compare lender fees, loan terms and lender reputations into your decision to refinance your mortgage.
You may also be able to get a lower interest rate by buying points on your mortgage. Be sure to run the numbers.
3. Don’t use the first lender you find. There are thousands of lenders out there, but they aren’t all created equally. It’s a good idea to consider lender reputation and whether or not your lender will continue to service your mortgage or sell it off to investors. Dealing with one lender over the course of your mortgage is often preferred over dealing with multiple mortgage servicers as sometimes paperwork gets lost, escrow requirements may change, etc.
Shop for the best mortgage rates. We recommend searching a variety of options before refinancing your mortgage. Some great places to shop for good mortgage rates include Quicken Loans and Lending Tree. We also have a mortgage comparison table on our site.
4. Consider all loan terms. Many borrowers are refinancing into a 30-year fixed mortgage instead of considering other options such as a 20-year or 15-year fixed rate, which would shorten the life of the loan and significantly reduce the amount paid to interest. Here are the pros and cons when comparing 15 and 30 year mortgages.
5. Consumers are uncertain of what documents are required to refinance: Borrowers who haven’t refinanced in recent years are sometimes fail to have the required document going into refinancing which delays the closing process. Be sure to gather all your documentation in advance and bring it with you to the closing. This will save you a lot of time, and possibly money.
6. Inaction. The current mortgage rates are excellent, but they may or may not be around for awhile. The sooner you lock in your rate, the sooner you can start saving money – and more importantly, not miss out on this opportunity.
7. Underestimating the time commitment. Refinancing your mortgage can be time intensive, depending on several factors, such as how much you owe on your home, whether or not their are multiple liens on the home, time of year, whether or not you are self-employed, and other factors. Be prepared to take a few days to compare mortgage rates, get your home appraised, and schedule the closing. The actual paperwork can take a couple hours depending on all of the above factors. My wife and I used a VA Loan to buy our home, which has a specific process for buying and refinancing. Thankfully, refinancing with a VA Streamline Refinancewas fairly easy.
Take all of these items into account, and you can likely save a lot of money by refinancing your mortgage.