Increased interest rates have been predicted for the fall, but so far they've just edged up slightly. Should homeowners panic if they hold adjustable rate mortgages? It might not be necessary for some consumers, but refinancing always remains a personal choice. At the same time, consumers who are locked into rates higher than the 3.91 percentage rate (August 6th) on a 30-year fixed-rate mortgage, may leap at the opportunity to refinance into a lower rate before there are further increases. Whatever their reasons for refinancing, borrowers should avoid making one these three critical home refinance mistakes that they might regret for decades.
Mistake #1: Not Having a Clear Refinance Purpose
Consumers must first understand that a home refinance restructures the payoff of the debt – it doesn't retire it. Having a clear purpose for a mortgage refinance precedes the key research on the financials that support changing rates or terms. Common reasons include changing the interest rate, monthly payments or the term of the mortgage. Some borrowers are looking to change from an adjustable-rate to fixed-rate mortgage, or the other way around. For others, it might be the need to borrow cash against the home's equity. In evaluating a refinance proposal, borrowers also should realize that appreciable savings will ultimately come through as a reduced interest rate, not a reduction of the size of monthly payments. Common refinancing wisdom suggests holding on to an existing mortgage and putting off refinancing until the current rate is at least 1 percent lower than the one on their current mortgage.
Mistake #2: Not Conducting Research on the Financials of Refinance
One of the most-dire of home refinance mistakes is failing to calculate the costs of refinancing beyond the changed term or interest rate. First, a home refinance will be unlikely to yield substantial paybacks if the owner plans on leaving the property within five years (benefits are realized). Next, there are costs to consider when evaluating a refinance quote. According to the Federal Reserve Board, typical refinancing costs may include:
- Refinancing fees
- Application fees
- Loan Origination fees
- Appraisal fees
- Inspection fees
- Attorney fees
- Title search and insurance
The break-even point is when the monthly savings under the new mortgage outweigh the costs of closing the new loan. In evaluating costs, borrowers can use LendingTree's Refinance Breakeven Calculator. The calculator presents a projected monthly payment, mortgage tax deductions, cost of interest, and how long it will take to pay off the existing mortgage. Remember, the original lender may also have included a prepayment payoff penalty on the initial mortgage.
Mistake #3: Not Evaluating Existing Credit Before Applying
Prospective borrowers might not realize that mistakes on their credit report will condemn them to the lender's rejection pile or force them to accept a much higher interest rate on their home refinance. Before applying for a new mortgage, homeowners should pull current credit reports from the big three: Equifax, Experian and TransUnion. Checking credit reports as early as six months before entering the loan application process may give borrowers enough time to clean up damaging entries and even improve their scores by making debt payments on time and paying off high-balance loans on the account. Beware of these two major ways to negatively impact scores used for refinancing:
- Opening new lines of credit.
- Making big-ticket purchases that increase your total debt-to-income ratio.
To find out where they stand, borrowers can calculate Debt-to-Income Ratio.
Terms and rates by lenders can vary greatly. Consumers should seek multiple offers on home refinance mortgages at LendingTree to explore the range of financing options by terms, mortgage types and interest rates.