There is no denying it: Refinancing can save you a lot of money. BUT if you aren't paying attention it could also cost you quite a bit!Everyone has a different situation and it doesn't always make sense to refinance. Even those who would benefit from refinancing could find themselves losing money because of mistakes.
To help you avoid that, we're looking into five of the more common mistakes and how to avoid making them!
Not Shopping Around
I'll bet you know where the cheapest gas is, right? Shopping around for mortgage costs is the same thing. There isn't a lot of difference in rates right now, but that doesn't mean it isn't worth the effort to shop around. Closing costs change from lender to lender as well and closing costs are upfront costs.
But the largest part of your mortgage cost is the interest rate you pay over the life of the loan. Even a quarter of a percent difference can save you sizable amount, depending on the loan.
Ignoring Closing Costs
Refinancing is a service and services costs money. Closing costs usually add up to about 1.5 percent of your loan amount. Closing costs usually include loan origination fees, application fees, and appraisal fees. Make sure that your total savings takes these costs into account!
Overlooking Short Term Mortgages
Usually when we think of a mortgage we automatically think 30 years. Guess what? There is a shorter term 15-year mortgage! If you have a fixed-rate mortgage, you will pay less in interest with a 15-year mortgage! The trade off is that your monthly payment will be higher. If you can afford the higher payment, take the 15-year mortgage.
Not Getting a Fixed-Rate Mortgage
Adjustable-rate mortgages (ARM) can look fantastic at times. Ever notice how they sometimes dip below 3 percent? How can there be a downside to that? Well, just keep in mind that they usually go UP when they do change.
With the market the way it is, fixed-rate mortgages rates are low, it is wiser to take ignore the ARM and get locked in at a low-rate.
Not Knowing Your Homes Value
Do you really know what your home is worth? It's an important question if you're thinking of refinancing your mortgage. Why? Because it could affect whether you qualify for refinancing, the rate you pay, or if you have to pay private mortgage insurance (PMI).
The best case scenario is that your home is worth at least 20% more than the mortgage amount. In other words, you are trying to refinance only 80% or less of your home's market value (and yes, the lender will want a professional appraisal).
What's more, if you don't have 20% equity, you'll likely also have to pay private mortgage insurance, which is often required by lenders to insure them against you falling behind on your loan payments, according to the Federal Reserve.
Before you start down the paper trail of refinancing, have a sober assessment of how much your home is worth. If you have less than 20 percent equity, make sure you can reduce your mortgage interest rate by enough to make up for the added cost of PMI.
If you need to know more about refinancing and if it is right for you click here!
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