Even though mortgage interest rates have begun to rise, some homeowners continue to take advantage of mortgage refinancing to save money. Refinancing a home loan has several benefits. Person with adjustable rates can convert to a fixed rate mortgage. Moreover, a cash-out refinance provides homeowners with a lump sum of money, which can be used to payoff debts. Unfortunately, a number of homeowners do not fully understand the refi process. As a result, they choose bad loans. Consider the following refinancing mistakes, and learn how to avoid them.
1. Select the Right Home Loan
A mortgage refinancing creates a new home loan. There are several types of home loans available to suit a range of needs. Before refinancing, research different loans. Finding the best loan with the most savings should be the primary goal. Homeowners must choose between an adjustable rate and fixed rate mortgage. Is a 15-year term, or a 30-year term best? Regrettably, some people rush the process and ultimately choose a bad loan.
2. Closing Costs vs. Refinance
Because a refinance involves applying for a new mortgage loan, homeowners are required to pay settlement or closing costs. The fee is generally 3% – 5% of the home price. Prior to refinancing, homeowners should closely evaluate the fees, and determine whether a refinance is in their best interest. Mortgage lenders may be able to provide a break-even analysis. For example, if the refinance closing fees are $2,000, and the monthly savings with the refinancing is $80, it will take approximately 25 months or 2 years to break even. If the homeowner plans to move within two years, a refinancing is not a wise choice.
3. Private Mortgage Insurance
Conducting your own research when buying or refinancing a home is crucial. Failing do to so means paying more than necessary for the mortgage. For example, the majority of mortgage loans no longer require down payments. On the flip side, homebuyers must pay private mortgage insurance, which is approximately $50 – $100 a month. The good news is that once the loan-to-value of the property falls below 80%, mortgage lenders can cancel PMI. If refinancing a mortgage loan, homeowners should avoid a cash-out above 80%. This way, they avoid paying PMI.
4. Shopping Around for Best Home Loan
Shopping around for a good refinance deal is important. There are a number of shady or dishonest lenders. For this matter, these individuals and companies purposely suggest bad loans or charge excessive rates and fees. Unwary borrowers fall victim to these schemes. Before accepting a home loan refi offer, research different lenders. If possible, contact at least three to four lenders and request a rate quote. Compare the different loans, and opt for the lender offering the best deal.