Low interest rates do not necessarily mean owners will save on their mortgages.
When interest rates are low, leading many owners to refinance before assessing the true consequences of their actions. A mortgage refinancing can benefit some homeowners, especially if they intend to stay in their homes for the long term or whether they can significantly reduce their interest rates. Sometimes, however, a mortgage refinance may be the wrong choice.
“People often make bad decisions because of what I call” the envy of interest rates “around the coffee table,” says AW Pickel III, CEO of Financial LeaderOne in Overland Park, Kansas “They jump to refinance just so they can tell their neighbors they got a lower rate.”
Here are five of the biggest mistakes homeowners make when refinancing.
Not comparing the actual rate
“Borrowers should shop around for a mortgage by comparing the APR (annual rate) of each loan, rather than the interest rate quoted,” said Gregg Busch, vice president of First Savings Mortgage Corp. in McLean, Va. “You must look at the actual cost of the loan and compare it to your current APR to ensure that you will really save a half point or more on the new loan. ”
Busch points out that many owners today are finding that their home is worth less than they assumed when they have an appreciation.
“Fannie Mae and Freddie Mac have added fees on loans with high loan to value, so borrowers need to reassess the rates and fees before they decide to refinance,” said Busch.
Borrowers who have little or no action may be eligible for refinancing under Home by the Government of affordable refinancing program, or harp, available to those with an existing mortgage owner or guaranteed by Fannie Mae or Freddie Mac.
“The beauty of the HARP program is that it does not require an appraisal, so if you think you are underwater on your loan, this could be a good option,” said Busch. “Just make sure to compare rates and fees to see if the new loan is worth the cost.”
Choosing the Wrong Loan
Pickel said the first step when deciding to refinance is to establish a clear objective.
“If you think you can lose your job, but you have a moment, your focus should be to reduce your overall payments regardless of the length of the loan,” says Pickel. “If you want to be debt free by some years, then you need to find a loan that meets that goal.”
Pickel said that sometimes, even with a lower interest rate, you could end up making higher monthly payments due to packing in closing costs has increased the size of your mortgage.
Each borrower must look at the cost of refinancing and the financial benefits before choosing a loan, said Busch. Forget that some borrowers to refinance into another 30-year mortgage can add years of payments, especially if they have paid on the loan during a long time.
“A ARM 10 / 1 (variable-rate mortgage) or a 10-year fixed rate loan can sometimes be a better choice depending on the individual circumstances of the borrower,” said Busch.
Not Shopping Around
While many borrowers to compare loan offers from more than one lender, they can also shop for title services and save hundreds or sometimes thousands of dollars on their loan.
“Check at least three lenders and at least three companies before choosing a title,” said Busch. “It can be an advantage to go to the Management Authority that manages your loan the same now, because they may require less documentation, but I recommend also searched at least one other direct lender to compare rates and expense. ”
Ask the company as a reissue rate on title insurance own your vehicle – Busch believes that this can save up to 35 percent on premiums.
When refinancing you should not
Charles A. Myers, president and CEO of Home Loan in Jackson, Mississippi, said refinancing can be a mistake if you do not plan to stay in your home for many years.
“One client wanted to refinance to improve his property and rent it, but it would have ended up with a larger mortgage and then need a different loan because the property is no longer the principal residence,” says Myers. “The key is to ensure that the refinancing has a net tangible benefit to the owner.”
Borrowers must decide how long they intend to stay in the property and determine the break-even as economies outweigh the costs before deciding to refinance, said Myers.
Does not follow the Borrower responsibilities
Owners should rely on a lender to refinance, but they have obligations of their own that they are not met, could derail the mortgage refinancing. Borrowers must have good credit to refinance with most lenders require a credit score of 640 and above even for a loan insured by the Federal Housing Administration, said Myers.
Lenders can check credit borrowers again just before closing, if you need to maintain good credit and avoid a new debt, even after the refi was approved.
“Check the lock-in date to the interest rate on your new loan to make sure you can close before the rate expires,” said Busch. “Be sure to turn in all your documents as soon as it is required, because a delay could mean that your date should be postponed.”