How to Avoid These 7 Common Mortgage Refinancing Mistakes
With interest rates as low as they are, many homeowners are eager to take advantage of this fact by refinancing their home loans.
However, while a refinance can help to shorten your mortgage term and reduce your payments, among other benefits, there are a number of factors to consider along the way in order to be certain that you’re making the right move.
In this article, we’ll outline seven of the most common mistakes that homeowners tend to make when refinancing their home mortgage, so you can rest assured your refinance move will benefit rather than harm you.
These seven errors are as follows:
1. Failing to shop around
A large majority of borrowers will go right to the bank for their home loan or refinancing needs, or will spend very little time scanning the rates of various lenders to then simply choose the cheapest option. Many homeowners are even under the false belief that they must refinance with their current lender.
In reality, you should be carefully exploring a variety of different lender options by comparing the rates, fees, and terms offered by each. With mortgage pricing being rather complicated, it’s definitely worth taking the time to assess such factors because as little as a one-eighth difference in a percentage point can result in tens of thousands of dollars in savings over the duration of your reverse mortgage loan.
2. Placing too much focus on mortgage interest rates
An extremely common (and costly) mistake among borrowers is putting sole focus on interest rates when comparing potential mortgage lenders. In some cases, a comparatively low-interest rate from a lender will be used to conceal a loan with unconventionally high fees in other areas, resulting in the borrower paying even more than if they went with a lender with higher advertised rates.
This is why it’s important to inquire about more than just mortgage rates when weighing your options, including loan origination fees, application fees, title fees, appraisals, points, credit reports, and any other kinds of costs before you put in your application.
Additionally, be sure to pay careful attention to the prepayment terms, and read the good faith estimate document provided by your lender, which outlines all of the costs in order to ensure that refinancing will be financially worthwhile.
3. Trying to time mortgage interest rates
Just as it isn’t advised to try and time the stock market, we also don’t recommend trying to time mortgage interest rates. Waiting and hoping that interest rates will eventually drop even further is often a strategy destined for failure, as rates very well may rise again at the drop of a dime.
If you aren’t a psychic (like the rest of us), then it’s best to just lock in any low interest rate you are presented with while you can, while all other conditions are also in line with your needs.
4. Not refinancing for an affordable amount
As refinancing can be quite an expense, you’ll want to ensure that you’re doing so at the appropriate amount. If your mortgage refinancing will involve taking out some of your equity and you are refinancing for an amount greater than your current traditional mortgage balance, make sure to request an adequate amount of equity to use with the long-term in mind.
Additionally, ensure that you’ll be able to afford the increased monthly payments before setting anything in stone.
5. Refinancing too often
Many homeowners will be tempted to refinance in cases of interest rates nearing attractive lows. Unfortunately, however, refinancing will only be fiscally advantageous if you’re saving enough in interest to ultimately make up for the closing costs. This will not always be the case when you consider that closing fees of mortgage refinancing can cost as much as 3 to 6 percent of the loan balance.
These costs add up over time, especially for borrowers that refinance too often. It’s much easier to avoid these piling costs by keeping refinancing to a minimum.
6. Taking out too much home equity
It’s a common practice to use a mortgage refinance as a way to borrow against equity, using some of these funds toward things like home improvements, repairs, or even significant purchases/investments. It makes sense to do so seeing as mortgage interest generally qualifies as a tax write-off, and rates are relatively low compared to other loan types.
Taking out home equity usually only becomes a problem when borrowers take too much out, leaving themselves financially vulnerable should the housing market take a dive or other issues arise. It’s best to always err on the more conservative side when taking out home equity.
7. Extending your loan term
Extending your mortgage loan term may seem like an attractive idea, as it will go a long way in reducing your monthly payments. However, homeowners should be aware that this move will likely end up costing them more in interest fees in the long term, even in the case of re-entering at a lower mortgage rate.
The wiser approach would be to refinance into a new loan term that is shorter, or, more specifically, a term similar to the duration remaining on your current mortgage.
Start Saving Through Mortgage Refinancing Today
When it comes to headache-free mortgage refinancing in Ontario, our experts are here to lend a hand. Canadalend.com can provide you with an optimized mortgage solution that is smart and beneficial to your specific circumstances, so you can start breathing a little easier.