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For many homeowners, the mortgage refinance process may seem intimidating at first, especially when any major mistake will likely cost you. Thus, to ensure you refinance the right way, here’s a quick overview of the most common Refi mistakes homeowners make and how to avoid them.
There are more than a few potential benefits when it comes to refinancing a mortgage. Moreover, for most homeowners, the opportunity to save tens of thousands of dollars over the life of the loan takes the cake.
Better still, refinancing can also provide homeowners with access equity to finance a home renovation or shave years off their mortgage. Nevertheless, all too often, homeowners make several common mistakes when refinancing. Thus, to ensure you know what to avoid in the future, read up on these mistakes now.
First and foremost, if you are wondering why you should consider refinancing at the moment, then you have come to the right place. In general, a mortgage refinance is a fairly painless way to trade in your current loan essentially for a better, new loan.
Many homeowners refinance to lower their payment or interest rate, while others refinance to turn pent-up home equity into needed cash. Many homeowners also refinance into a shorter term, like a 30-year loan into a 15-year one. So, if you are interested in saving money on your mortgage or accessing your home’s equity—then you should seriously consider refinancing.
There are several refinancing mistakes you should avoid to ensure that your mortgage refi goes smoothly.
As you are likely aware, your credit history is important when you are looking to refinance. Yet, many homeowners make the mistake of not checking their credit scores before deciding to apply for refinancing.
Instead, not only should you check your credit score or history, but you should also look out for inaccuracies. In doing so, you can ensure that your credit history is correct and thus have access to the best terms possible. Note, it is also important to prepare for a refinance by getting your finances in order and by avoiding large purchases that can negatively impact your credit score in the meantime.
Another common mistake homeowners make is failing to comparison shop. Yet, data suggests that obtaining multiple rate quotes from just a handful of lenders can cut a homeowner’s interest rate by as much as .50 percent.
Thus, it is in your best interest to shop around, especially since your current lending institution may not offer the best deal. You can avoid this mistake by simply comparing rates from three to four lenders before deciding and keeping in mind that rates fluctuate.
Along those same lines, many homeowners assume that you have to accept a refinance offer “as is.” However, just like interest rates, many fees may be negotiable. Furthermore, when you comparison shop, you just might be able to use those multiple offers to your advantage and bargain for a better deal.
Note, third-party fees may also be negotiable, depending on your state’s laws. Here, it is beneficial to do a little research in order to know what your options are and to avoid overlooking possible irrelevant fees.
Homeowners also sometimes tap into their home equity haphazardly. In other words, a common mistake is financing short-term expenses with a long-term loan. For example, a car with a five-year life may not justify a 30-year mortgage loan.
Likewise, a mortgage is an expensive way to pay for a vacation. Instead, homeowners are likely to fare better (receive more value) by investing in home improvements, a college education, or a promising business venture with proceeds from a cash-out refinance.
Ultimately, the best way to avoid this refinancing faux pas is to ask yourself, will your equity, if tapped, yield long-term returns? A cash-out refinance might be your next move if the answer is yes.
As suggested, refinancing can be extremely beneficial and a good decision, especially if you are looking to yield long-term returns. But be that as it may, refinancing has its time and place. Nevertheless, many homeowners are guilty of refinancing too often, which means they are likely extending their mortgage term again and again.
Of course, there are instances where another refi makes sense. A prime example of this is if the lowest possible payment is your goal, then extending your home loan term again or rather so soon is likely the best move.
Alternatively, a homeowner may also refinance a mortgage with a shorter term. Thus, in this particular instance, this common mistake is not applicable. That said if you are looking for a way to avoid frequent refinancing from extending your mortgage term, making additional principal payments can help.
According to a Fannie Mae survey, a significant number of homeowners underestimate the value of their homes. By failing to obtain an accurate estimate of your home’s value, however, you might end up overlooking savings opportunities, miss out on the chance to eliminate mortgage insurance or forego a lower interest rate.
That said, most refinancing options require an appraisal and do take into consideration your home’s value. But if you opt for an FHA streamline refinance, an appraisal is typically not required.
Similarly, VA loan rates are not based on the home’s value, and thus a lender often will not request an appraisal. Nevertheless, regardless of the loan product or type of refinancing, obtaining a realistic estimate should not be something you skip for the aforementioned reasons.
Lastly, homeowners sometimes forget to check the estimate before they agree to a refinance–so do not make that mistake. And remember, even though there are opportunities to save here, there are other fees and cost to consider (points, origination fees, additional fees that affect closing costs, etc.). Therefore, you should make it a point to review your estimate, so there are no surprises when it comes to these costs.
Overall, to ensure that the entire process runs smoothly, you can do a few things, like make sure the refinance benefits you, know your ultimate goal for the refinance, properly prepare for a refinance, and avoid the above-mentioned common mistakes.
It is also vital that you do your research and understand how to have the best experience possible when refinancing your home. That said, you should also speak to a trusted mortgage professional who can assess your unique situation and future goals to ultimately help you make the best decision..
Do you have questions about home loans or refinancing? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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