Mortgage Refinancing Mistakes
September 15, 2010
Mortgage Refinancing Pitfalls
Thinking about mortgage refinancing? You’re not alone, with some of the best mortgage rates available in history many people are debating whether they should spend the money and refinance.
The benefit of refinancing comes from borrowing at a lower mortgage rate so you can either lower your payments or reduce your loan term, either way saving thousands of dollars over the life of your home loan.
However, there are some pitfalls to watch out for; here are some of the mortgage refinancing mistakes you want to avoid:
Paying High Closing Costs
When you refinance, you are essential getting a new mortgage to replace your old mortgage. This means fees; origination fees, administrative fees and other closing expenses.
Many people simply pay them, adding them to the cost of the loan and reducing the savings benefit of refinancing your home. Instead, shop around and compare costs between various banks and credit unions. Check out this article on how to lower your home loan closing costs.
Not Getting a Big Enough Discount on the Rate
Many people refinance because rates have dropped but then find that the difference in the interest rate wasn’t big enough to really save them money. If there is only a small difference, the closing costs can erode the savings you are getting.
If you don’t stay in your house for five to seven years after you refinance, this small difference can actually result in you losing out over all. The generally accepted rule of thumb is that the new rate should be at least a full percent lower than your current rate, and you should be planning to stay in your home for a few years.
Waiting Too Long for a Good Rate
It is tricky trying to predict how low mortgage rates will go. In some cases, you might wait too long, and then find that you missed your opportunity. At this point, mortgage rates are unlikely to drop very dramatically again in the near the future. Waiting for even lower rates could mean that you miss out altogether.
Look at the current rates, and then look at your mortgage rate. If you will be saving more than one percent, it might be worth it to just go ahead and refinance now. Rates are not likely to head another full percent lower, but if they head higher, you will have missed out.
Cash Out Refinance
One of the biggest mistakes that people make with mortgage refinancing is to get a cash out loan. In this type of refinance, you get a loan for more than you owe. For instance, if you owe $170,000 on your home, but it is worth $205,000, you might refinance for $180,000. You pocket the $10,000 difference between what you actually owe and what you borrowed. (Of course, closing costs can erode what you actually end up with.)
Cash out refinances can be an issue for several reasons. First of all, you are adding to your debt. Another concern is that your cash out finance could put you above the 80% loan to value ratio, and result in the necessity of paying private mortgage insurance, which adds to your costs. Some people like to do a cash out refinance and pay off consumer debt, but if you are not careful, this could land you in even more trouble — especially if you just run up the balances on your newly paid credit cards.
In the end, it’s better to avoid a cash out refinance if you can, and just stick to refinancing what you actually owe on your home mortgage.
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