Mortgage Refinancing: The Overlooked Mistakes You Want to Avoid!

Mortgage Refinancing-The Overlooked Mistakes You Want to Avoid- 150x150Mortgage refinancing can be a true life saver when done correctly and at the right time. Making your monthly mortgage payment smaller will free up cash that can be used for other monthly expenses or be put in savings. But before you are lured by the smaller mortgage payments and interest rates, you must be sure that you understand how refinancing works. Understanding this process is the only way in which you can make sure that you avoid making mistakes that will cost you time and money.

Refinancing is expensive and it comes with considerable risk, especially for those who are first time home owners and for those that are refinancing for the first time. The most important thing when refinancing is finding out if the new loan is truly saving you money. Taking refinancing costs into consideration is very important when comparing your current loan to the new loan. Another important thing to consider is how long you plan on living in your home. In order to cover the cost of refinancing, you will have to live in your home for two or more years.

Making a mistake when refinancing is very easy and you will end up regretting making the decision to refinance. But do everything by the book and refinancing will prove to be exactly what you needed to make your life easier. Here is a list of the mistakes that you want to avoid making when refinancing.

Mistake #1: Refinancing Multiple Times

In rare cases, refinancing multiple times makes sense, especially if it is done over the course of a few years. But most of the time, if done very often, refinancing multiple times will result in losing money instead of saving it. Low interest rates are attractive for everyone, and most home owners will give refinancing a thought when interest rates are near record lows. Home owners who have recently refinanced might get the idea that they will save even more money if they refinance again, because the rates are so low.

Unfortunately, refinancing is expensive, costing up to 6 percent of the loan amount. Saving enough in interest for the closing costs to be covered is unlikely if you recently did another refinance. This means that your loan balance will increase, negating the savings that refinancing should bring, making you lose money. It is recommended that you don’t refinance before recuperating the closing costs from your last refinance.

Mistake #2: Not Shopping Around for a Lender

Lenders are always competing with each other, so shopping around for a refinance is a smart thing to do. Even if the first loan that you are offered has a low interest rate, good terms, and seems like exactly what you’re looking for, you still have the option of contacting other lenders. By comparing mortgage lenders and what they are offering, you could save thousands of dollars.

If you have a good relationship with your current mortgage lender, he might offer you a good deal on refinancing. Even if that is the case, it doesn’t hurt to take a look at what other lenders are offering.

Mistake #3: Ignoring Some of the Costs of Refinancing

If you are planning on refinancing your mortgage, you need to find out if the savings outweigh the cost of refinancing. Refinancing closing costs involve several fees, some high and some low. Not taking into consideration some of these fees, like the origination fee, which can be a few thousand dollars, can make refinancing more appealing, but there is no way of avoiding this fee. You might think that you are saving money by refinancing when in fact the closing costs will be much higher than the savings you are making by taking out a loan with a lower interest rate.

Mistake #4: Not Locking In Your Interest Rate

Not locking in your interest rate is like gambling. You hope that the interest rates will go lower before closing, and you end up with a more advantageous rate, but you are aware that there’s a risk that the interest rate will increase, making your payments higher than you anticipated.

Not locking in your interest rate is especially dangerous with refinancing, because you have to make sure that refinancing will actually help you save money. If you come to the conclusion that you are, indeed, saving money with the interest rate that your lender is offering, but don’t lock in and the interest rate increases, the whole refinance could become just a waste of time and money (Read: Mortgage Refinancing Guidelines).

Mistake #5: Extending Your Mortgage Loan’s Term

When refinancing, you are basically resetting the term on your mortgage loan. Your monthly payments will be lower, but you will be paying more in interest, especially because most of the payments go towards the interest when taking out a new mortgage loan.

Extending your mortgage loan’s term would be a mistake, and you should aim towards taking out a loan with a term close to what has remained on your current mortgage, or even shorter.

Taking precautions before refinancing will help you find out if refinancing is the right step for you, and make sure that the whole process goes smoothly. Your goal is to save money on your mortgage, so avoiding these mistakes should be your top priority when refinancing your mortgage.

Here’s What You Can Do When Turned Down for Refinancing

Here's What You Can Do When Turned Down for Refinancing- 150x150Refinancing is a great way of saving money on your mortgage when interest rates are low. Refinancing has strict guidelines, and making your mortgage payments on time may not be enough to convince your lender to allow you to refinance. Mortgage refinancing requires a home appraisal, a significant number of documents that show your income and assets, and a good credit score. Not meeting one of the lender’s requirements may result in a denial. Fortunately, being turned down for refinancing is not the end of the world and you should know that you still have options. Here are a few reasons why you may be denied and what you can do to make refinancing possible.

Little or No Equity in Your Home

The number one reason why home owners are being refused when trying to refinance is the lack of home equity. Your problems don’t even have to go as far as being underwater on your mortgage, or owing a larger amount than your home is worth. Simply having low or no equity in your home can trigger a denial from your lender, because they prefer a borrower who has a nice amount of cash tied up in his or her home. The simplest way out of this situation is to come up with more cash, but, if you take into account the high refinancing closing costs, you might realize that a few extra thousands will be hard to find.

An alternative would be the Home Affordable Refinance Program (HARP), designed by the government to help home owners with little or no equity in their homes. Recently, this program has undergone some changes, which should help you get approved easier than before. The program is designed for home owners who have less than 20 percent equity in their homes, but some lenders might use their own guidelines when deciding if you qualify for HARP.

Another alternative would be refinancing into a Federal Housing Administration (FHA) mortgage. FHA mortgages require a low down payment and equity, but you may be required to pay additional insurance on this type of government insured mortgage loan.

Low Credit Score

Your credit score has a large impact on not only your interest rates and the loan value, but also on whether you will be allowed to refinance or not. If your credit score is bad, your only chance of refinancing is by improving it. It might take a year or two, but if your credit score wasn’t affected by anything major, you should get it into a more favorable range with little effort. Paying your bills on time is the first and most important step when trying to increase your credit score. If, however, you have a large blemish on your credit report, such as a bankruptcy, then increasing your credit score will prove to be more difficult and can take up to 10 years.

Low Income

Lenders usually require your debt to not exceed 43 percent of your monthly income, while monthly mortgage payments, property taxes and insurance are limited to 30 percent. Reducing your debt can help tremendously when trying to look better in the eyes of a lender. You could quickly pay off some or all of your debt if you have access to savings or other investments. Some of these solutions might not be the best, and it all depends on your situation, and how much you want or need to refinance.

Of course, the simplest thing you can do when being turned down for refinancing is talking to another lender. Lenders are in competition and sometimes have significantly different offers for their customers, so shopping around is always a great idea, even if you are approved by one lender. You might find a more attractive offer with a lower interest rate or closing costs somewhere else. Don’t be discouraged if your refinancing is declined because there are ways in which you can drastically improve your chances in a very short amount of time.

Addicted to Refinancing Your Home Multiple Times? You’re Not Alone

Addicted to Refinancing Your Home Multiple Times- You're Not Alone- 150x150A few years ago, when the housing market was booming, many home owners started to take advantage of the lower interest rates by refinancing their mortgages. For many borrowers refinancing is a great opportunity to save money on their mortgage, but there are other factors besides the interest rates that should be considered when determining if refinancing is a good choice.

Refinancing a mortgage multiple times has become a trend among borrowers, with more than 2.2 million refinances recorded since 2009. Because interest rates are still near record lows, there really aren’t any reasons for home owners to stop refinancing. Normally, refinancing a mortgage is an expensive process, so the high cost doesn’t always financial sense for home owners to go through with it, even if the interest rate on the new loan is significantly lower.

But lenders are coming up with ways of attracting refinances by lowering the closing costs or waiving certain fees, making refinancing much more accessible. Closing costs are not the only factor of what home owners should consider before refinancing. Many mortgage loans also include a prepayment clause, which force the borrower to pay a steep penalty if they wish to pay off their mortgage earlier. Some lenders are even willing to waive the prepayment penalty. Don’t be fooled, though. Lenders usually recover the waived and lowered fees by charging a higher interest rate.

Should You Refinance Multiple Times?

Through history, as interest rates went down, the number of home owners who refinanced went up. Right now, with interest rates on the rise, but still near record lows, and the job market recovering, people are in a rush to refinance their mortgages. Refinancing more than once makes sense, but only if you do your homework, and come to the conclusion that it will actually save you money. Many borrowers refinance thinking that a lower interest rate will save them money, while the cost of refinancing may actually cause them to end up with a more expensive loan, which will result in losing money.

Refinancing and getting a lower interest rate will not only reduce your monthly mortgage payment, but will also reduce the principal on your mortgage. Having a lower mortgage payment will free up money that can be used to make other purchases or even pay off other debt, which will increase your credit score, making future loans more accessible.

The downside to mortgage refinancing is that, with each refinance, you are basically resetting your mortgage term to a longer term, such as a 30-year term. This means it will take you a longer time to pay off your debt. Refinancing also requires a lot of running around, gathering several documents and more scrutiny on your credit score. The biggest downside of all is that refinancing is normally an expensive process, which can actually cause you to lose money.

Refinancing isn’t really a viable option for borrowers with low credit scores. Even if the lender is willing to waive some of the closing fees, applying for refinancing with a low credit score will either get you rejected, or you may find that there is no way to receive a loan with a lower interest rate.

Refinancing multiple times pays off for many home owners, especially if they manage to secure a lower interest rate and the lender is willing to waive some of the closing costs. When trying to determine if refinancing again is a good idea, make sure that you take all of the costs into consideration, or you might end up paying more than on your previous mortgage loan. Saving money by refinancing is more than just getting a lower interest rate from your lender. If you do the research and come to the conclusion that refinancing again is worth it, then doing it multiple times is a wise choice.