Refinancing Do’s, Don’ts and Mistakes

August 16, 2011 3 Comments »

refinance

Mortgage rates are super low again and so you may be considering a refinance to snag some of the savings.

But before you apply, be sure you do your homework to ensure it makes sense financially, and to see if you’re actually able to do it.

Obviously the landscape has changed significantly since the mortgage crisis. It’s a bit of a double whammy really.

It’s Tricky Now

Home prices have plummeted and mortgage underwriting has become a lot more stringent, making it especially difficult to get approved for a mortgage.

That said, you must take extra care before beginning the application process.

Before we get into that, does it make sense to refinance? Perhaps you snagged what you thought was a rock-bottom rate last year, only to watch mortgage rates fall even lower.

But it may not be worth your while to see if you can get your 30-year fixed in the high 3% range if you’re currently enjoying a rate of 4.25% to 4.50%.

For some, namely those who plan to stay in their home for the long haul and actually pay off their mortgage, snagging an even lower rate may make sense.

For those who see themselves in a temporary or “starter home,” constantly refinancing will probably be a losing endeavor, given the associated closing costs that must be recouped, unless they’re paying an astronomical rate or in an adjustable-rate mortgage.

Even if you go for a no cost loan option, the rate may be too high to justify the refinance.

Either way, play around with a mortgage amortization calculator to see if refinancing will actually save you money. You may be surprised to find that the savings are minimal, even if you hold onto the mortgage for the entire term.

Will You Snag Those Low Rates?

Assuming you do decide to refinance, check your credit scores long before you begin the process. If your credit scores aren’t in great shape, you won’t qualify for those low rates anyways, so that could stop you in your tracks right there.

(What credit score do I need for a mortgage?)

If your scores are looking good, do not mess with your credit leading up to the application or during the loan process. That means no applying for credit cards or any other type of loan, or making big charges on existing lines of credit. Just hold off until the refinance is done!

Also check your current property value. Do you have any home equity or are you holding onto an underwater mortgage? Without equity it will be nearly impossible to refinance unless you’re able to take advantage of one of the government programs or bring cash in at closing (cash in refinance).

And the higher your loan-to-value ratio, the higher your mortgage rate will be, wiping out the possible benefit of a refinance.

[Check out my mortgage payment charts to compare rates.]

Is Your Home Listed?

If you happened to list your property before deciding to refinance, that could be a stumbling block as well.

You may have to kill the listing and wait six months before being eligible for a refinance.

Also watch out for prepayment penalties, which prevent you from refinancing for a certain period of time. If you’ve got a “prepay” on your current mortgage, refinancing could trigger a costly penalty.

If you’re deep into your mortgage term, meaning you’ve already paid off a good chunk of it, “resetting the clock” may not be the smoothest move either.

For example, if you’ve already paid off 10 years of your 30-year mortgage, you may be better served refinancing into a 15-year loan rather than another 30-year mortgage.

Shop and Compare Options

Did you make it through the gauntlet and discover that you can get your hands on those low rates and save some money?

If so, be sure to take the time to shop around at multiples banks, mortgage lenders, and enlist a mortgage broker or two.

Not taking the time to comparison shop is a huge fail and should be avoided at all costs. If you’re looking to refinance, you’re obviously out to save some money. Put in some real effort to ensure you save the most money possible.

And look at different options, such as shorter loan terms and such. If your current rate is particularly high, you may be able to refinance from say a 30-year fixed to a 15-year fixed and wind up with a similar mortgage payment.

[30-year fixed mortgage vs. 15-year fixed mortgage]

That could save you a ton of money. An adjustable-rate mortgage could even make sense if you plan to pay down your mortgage aggressively or if you think you’ll be moving within the next five to 10 years.

But don’t just buy down your rate just for fun and giggles. Do the math first. You may be better off at the par rate.

Also recognize the fact that mortgage rates are cheap, meaning your money could be better spent elsewhere, such as in an investment account or to pay off higher APR debt.

Finally, be sure your mortgage rate is actually locked, meaning it won’t change come the day you sign your loan documents. Some borrowers seem to think their rate is set in stone because they got a quote. But without written confirmation, you could be in for a surprise.

Read more: When to refinance a mortgage.

3 Comments

  1. Tina Marie Nigro April 13, 2013 at 9:53 pm -

    We plan to close on a HARP loan next week but, also have been looking at a new house to buy. Is their a prepayment penalty if we happen to find the perfect house say like in three months after we close on the HARP loan, if so how much would we have to pay?

  2. Colin Robertson April 15, 2013 at 11:10 am -

    Tina,

    Check your loan documents and ask your loan officer is any prepayment penalty applies. And if so, what the cost is.

  3. Mary July 28, 2013 at 10:49 am -

    Appreciate the info, it’s good to know.

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