There are many reasons to consider a mortgage refinance—shrinking your monthly payments, minimizing your interest rate, or freeing up additional cash for another major purchase. With that said, refinancing doesn’t always work out as borrowers hope it will, and there are a few common refinancing errors you’ll want to avoid.
Before you make a commitment to refinance, make sure you know what some of those errors are—and how you can avoid them.
Where Refinancing Goes Wrong
Refinancing When It Just Doesn’t Make Sense to Do So
The main reason people refinance is to take advantage of lower interest rates. But what if interest rates aren’t that much lower? A good rule of thumb is that there should be more than one full percentage point separating your current rate with the new one—and if that’s not the case, you may want to hold off on refinancing. After closing costs, the total savings may not be enough to make any demonstrable difference in your monthly payments.
Ignoring Bad Credit
Another common mistake? Ignoring a bad credit score. When your credit score is low, it makes it harder for you to get really good interest rates from your lender. That’s not to say that it’s impossible, but you may want to spend some time improving your credit before pursuing a refinance.
Misunderstanding No-Cost Refinancing
A no-cost refinance is one that claims to not have any closing costs. Of course, there are indeed closing costs, and they get rolled into your monthly payments. This means they’re likely to be higher, even though you’ll pay less in upfront cash. No-cost refinancing isn’t necessarily a bad thing, but you should know what you’re getting into.
Refinancing into the Wrong Mortgage
30-year into 15? Fixed term into ARM? It’s all possible—but is it advantageous for you and your family? That’s something you’ll want to discuss with your mortgage professional.
Taking Cash Out
When you refinance, it’s possible to take cash out of your loan and put it toward something else. This can sometimes be prudent, but it can just as often be a mistake, as it lessens your home equity and can make interest rates go up. Talk it over with your loan officer before making a decision.
Make a Smart Refinance
Refinancing can be a great move, financially, but you need to go about it prudently. Contact a member of the Loan Fleet team to learn more about the smart way to refinance.