Whether you have been paying off your mortgage for one year or twenty, you should always keep yourself open to refinancing. When you refinance your mortgage, you replace it with a new loan structure, ideally with a lower interest rate and a few other benefits. Restructuring your loan requires finding the right timing, and it will involve some costs. Depending on the type of refinance you choose, it can significantly improve your cash flow.
There are many reasons to refinance. You may want to take advantage of low interest rates, reduce your monthly payments, or get cash from the equity you have put into the home. When you have money freed up from your mortgage payments, you can use it to pay off other debts, reinvest in a new property, or renovate your house, among other things.
When you want to reap the benefits of refinancing, you will need to study the market and review the available options. A misguided refinance plan can send your costs soaring and put you at risk for defaulting on your loan.
Many people rush into restructuring their loan without doing their research. The promise of lower rates and access to cash may sway them before they fully understand the impact on their expenses. If you want to avoid putting yourself at risk, here are some common refinancing mistakes you should avoid making:
1. Not comparing rates
When you find a reason to refinance, don’t jump at the first offer that comes your way. Plenty of lenders make attractive offers that can lure unsuspecting borrowers with short-term gains. If you want to have a better idea about the market rates, shop mortgage rate quotes from at least three lenders and consult a trusted broker.
2. Waiting too long
Interest rates change daily, and the federal government can change policies on lending from week to week. When the market is in a slump, it can be tempting to keep waiting to see how low the rates will go. Unfortunately, the market can rebound as quickly as it dips, and you may miss the chance to get a lower rate. Many refinance experts recommend that you wait for the rate to drop by at least one percent from your current mortgage rate. A full percentage drop can equate to hundreds of thousands of dollars in savings each month!
3. Focusing on the mortgage rate alone
While the mortgage rate largely influences the plan’s cost, you should also consider other components such as the repayment term. If you are ten years into your mortgage and don’t plan to move or sell your home, you may not mind re-setting the repayment period to zero. A longer mortgage term may mean lower monthly payments. If you have the resources, you may opt for a higher monthly amortization but a shorter payback period.
4. Not counting closing costs
The closing costs associated with refinancing can cost just as much as the fees of your original mortgage. They can run anywhere from $1,000 to $10,000, depending on the lenders. You may need to compute for a breakeven point—where the new loan’s savings will be significant enough to cover the closing costs with some change to spare.
5. Not saving enough money
Lenders want to see improvements in your financial situation over some time. Saving more money, increasing your income, or paying off other debts and credit lines can make you eligible for better rates. If you miss payments on your current loan or don’t pay on time and in full, you may not qualify for refinancing.
Refinancing is calculated risk, so be sure to take the time to understand what you agree to. Take the time to compare your offers and read the fine print. The goal of refinancing is to relieve you of some financial burdens, not add to your existing ones. When you can avoid these common mistakes, you place yourself in a better position to benefit from your new loan.
Are you looking for the best mortgage rates in California? We can assist with new mortgage and refinancing applications with fast, easy, and reliable financing services. Call us today and let us help you find the financing solution that fits your needs.