There are many reasons a person may refinance their home loan.
However, you want to think carefully before you refinance.
The most important thing is that you save money in the long run, or it helps you get out of a very difficult financial situation.
In the end, it needs to make sense. But when it comes to money, it’s not always clear what is right and what’s the best move. To help you with that, I’ve created this list of 7 mistakes people make when they think about refinancing their home loan.
Here they are:
You don’t take advantage of current low interest rates
The main reason why people refinance their mortgages is to save money. The way money is saved is when interest rates are good and refinancing means you can lower the interest rate on your home loan.
You’ll want to check what your current interest rate is on your mortgage and compare it to what lenders are offering. If you see a percentage difference of about 1% or more, it generally means you may be able to save money by refinancing. And this is when you should absolutely dig deeper into refinancing.
Get refinancing quotes from several lenders to see if you can indeed save hundreds of dollars on mortgage payments each month by refinancing.
You refinance when your credit score has gone down
If your credit score has taken a hit since you initially got your mortgage, you may be unable to refinance your loan to save money. The interest rate you receive on loans is very related to what your credit score is. You want to make sure your credit score is as high as it can be before refinancing. If it’s not, you can learn how to raise your credit score here.
You don’t think about how long you will live in your current home
When you refinance, there will be costs associated with obtaining this new loan. It only makes sense to take on this added cost if you will recuperate it and save money in the long run. That means you’ll want to stay in your home until at least your break even point (where you’ve covered all costs associated with refinancing). Essentially, if you plan to live in the same home for many years, refinancing can make sense. But if you think you’ll move in the near future, think more carefully about refinancing.
You refinance because you’re broke, only to refinance again for the same reason
A lot of people refinance their mortgage because they need money to pay off debts or for other financial reasons related to needing money. So they use the equity they’ve built in their home to pay for things. This CAN be a smart move if you are refinancing to pay off high interest credit card debt. But if you’re refinancing to buy a vehicle you don’t really need or take luxurious vacations you can’t truly afford, only to run out of money again and be back in the same broke position, refinancing is likely not the smart move.
You continually refinance onto 30 year mortgages
You are able to refinance your loan into new terms. For example, 15 year and 30 year are a couple popular terms. When you refinance onto a longer term (like 30 years), it means you will pay your home loan back over a longer period of time, which can benefit you by decreasing your monthly mortgage payment. However, it also means you will be paying more interest for your loan overall because the longer you take to pay a loan back, the more interest you pay. Resist the urge to continually refinance your loan onto 30 year mortgages. It just means you’ll continually have a home loan to pay into perpetuity.
You don’t check multiple lenders for the best refinancing rates
Checking a few lenders to see what rates they offer is not good enough. You want to check multiple lenders. You want to see who can give you the best rate. It mostly comes down to the interest rate when you refinance. A difference of half a percent can mean saving ten thousand dollars or more over the life of the loan. It’s a big deal. Make sure you get MANY quotes.
You can use this website to get online quotes from many lenders at once to compare rates.
You don’t check your credit reports before applying for refinancing
Your credit report is always important to check and keep up to date. At any time, an incorrect item can show up on it. And this item could lower your score. In fact, if it’s something like a collections item, albeit your fault or not, it can drastically damage your credit score. You need to check and deal with these items before you apply for a refinanced mortgage because issues on your report can mean you pay higher interest rates because your credit score isn’t where it should be.
You have the means to pay off your home loan quicker but you don’t
Paying off your home loan faster means paying less money to cover interest costs of borrowing. It’s a fantastic thing to do if you can financially do it. Especially if interest rates are good, you can lower your interest rate and also refinance your mortgage onto a shorter term. This means you’ll pay your loan off quicker, pay less interest overall today and for the life of the loan, and it could possibly decrease your monthly payments, though this would depend on just how short you make your new loan and how much of an interest rate difference the new rate is.
If you’re in a position to pay off your home loan quicker, think about paying it off more aggressively while your money situation is good. Again, make sure to get quotes from many lenders. You can check here for online mortgage refinance quotes in one place.