As mortgage rates continue to hover near historic lows, many homeowners are considering refinancing to reduce their monthly payments. While refinancing can offer significant savings, it’s essential to navigate the process carefully to avoid costly errors. Here are six common mistakes to steer clear of when refinancing your mortgage:
Neglecting to Shop Around for the Best Deal
A common mistake made by consumers is to accept the first mortgage offer they are presented with without considering alternative possibilities. Just as you would compare prices when purchasing a car or booking a flight, it’s crucial to compare mortgage rates from multiple lenders. According to the U.S. Consumer Financial Protection Bureau, over 30% of borrowers do not comparison-shop for mortgages.
Research by LendingTree indicates that homeowners who refinance without shopping around pay an average of $163 extra per month, totaling $1,953 more annually. To ensure you’re getting the best deal, obtain official loan estimates from at least three lenders. A loan estimate is a standardized document detailing all the costs associated with your mortgage, allowing for an apples-to-apples comparison.
Assuming Federal Rate Cuts Directly Lower Mortgage Rates
It’s a common misconception that when the Federal Reserve cuts interest rates to near zero, mortgage rates will follow suit. In reality, mortgage rates are more closely tied to the yield on 10-year Treasury notes. While the Fed’s actions can influence mortgage rates, they do not directly set them. Therefore, don’t expect to find zero-percent mortgages simply because of a Fed rate cut.
Overlooking the Impact of Closing Costs
Refinancing isn’t free; it involves closing costs that can range from 2% to 6% of the loan amount. Failing to account for these expenses can negate the savings from a lower interest rate. Before proceeding, calculate your break-even point—the time it will take for your monthly savings to cover the closing costs. If you plan to move before reaching this point, refinancing may not be beneficial.
Extending the Loan Term Unnecessarily
While refinancing to a new 30-year mortgage can lower your monthly payments, it may also extend your loan term, leading to more interest paid over time. For example, if you’ve been paying your current mortgage for 14 years and refinance to a new 30-year loan, you’re extending your mortgage to a total of 44 years. Consider refinancing to a shorter-term loan, like a 15- or 20-year mortgage, to save on interest and pay off your home sooner.
Not Considering the Break-Even Point
Understanding how long it will take to recoup the costs of refinancing is crucial. This is known as the break-even point. Refinancing might not be the best option if the time to break even is longer than the length of time you intend to remain in your house. Carefully evaluate your future plans and how long you intend to remain in the property before deciding to refinance.
Failing to Lock in a Low Rate
Mortgage rates can fluctuate daily. Once you’ve found a favorable rate, it’s wise to lock it in to protect yourself from potential increases before your loan closes. Discuss rate lock options with your lender to ensure you secure the best possible rate during the refinancing process.
By avoiding these common pitfalls, you can make the most of refinancing opportunities and secure a mortgage that aligns with your financial goals.
