Mortgage rates have stayed in the 3 to 4% range for a long time, even though the Fed did hike rates a bit at the end of last year. This is making mortgage refinances more popular than ever. In some areas, some home owners are having to wait two months to close on a refinance due to high demand with many lenders! If you want your mortgage refinance to go smoothly with your local bank, you should avoid some of the common big mistakes. These include the following:
1. Not Shopping Around
Dealing with your local bank has advantages. You may get better service and may theoretically be able to close faster. However, some borrowers just decide to stick with their local bank out of default. Perhaps the bank is where they got their original mortgage and for convenience sake, they decide to do their refinance there. This can work out fine, but you would be wise to shop for lower rates and fees. You can save money up front in fees and many thousands of dollars over the life of your loan if you can find a lower rate with another lender. Also, note that you will not usually get a better rate if you stick with your current lender. You should get at least three quotes from lenders and brokers and see how their rates and fees compare. Do not worry about having your credit pulled several times in a 30 day period to do a mortgage refinance. Your credit should only be hit with a credit score decrease once.
2. Not Getting Your Credit Score in Shape
Smart and financially savvy home owners might be shocked, but some home owners decide to refinance and they do not keep careful track of their credit score. Currently, you need to have a credit score of 640 or so to do a mortgage refinance at a good rate, but you will be better off if your score is above 700. Remember that only ¾ of lenders will work with you if your score is under 640, and rates will be higher.
3. Not Thinking About All of the Refi Costs
Everyone wants to drop their monthly payment when they refinance. This is a fine goal, but there are other things to consider. Remember that there will be a few thousand dollars in closing costs and possibly an appraisal fee when you refinance. If that is going to cost you more than you are going to save in payments in a year, you may think about refinancing. Especially think twice if you are close to paying off that first mortgage.
4. Not Locking Your Mortgage Rate
Mortgage rates change every day, so when you are all ready to refinance, you should lock in the rate. It usually is not a good idea to let the rate float, unless you really are near certain that rates will drop significantly in the next 30 days.
5. Not Considering the Loan to Value Ratio
The LTV is how much your loan is when it is expressed as the percentage of the value of the property. An 80% loan to value is common; that is, you want to borrow $80k and your home is worth $100k. Having a higher LTV will not stop you from doing a refi. However, you usually need to buy mortgage insurance. This is another cost per month of at least $100 or $200.
6. Not Considering Debt to Income Ratio
DTI is what the lender uses to gauge how likely you are to pay your debts every month. So, if your monthly income is $4k, and all payments on your debts other than housing are $800, the DTI is 20%. Your bank may have flexible guidelines on this, but be wary if you are carrying a very high debt load, especially one that is much higher than it was when you took out your loan. If you have not risen your income substantially, you could be denied.
7. Taking On New Debts
When you are about to refinance, it is probably not the time to go out and finance a new car or take on $10,000 of credit card debt for new furniture. Again, financially sharp people may be shocked, but some people think they can go run up debt when they have their refinance approved. The bank is going to check your credit again right before you close. If you took on a ton of new debt, a denial could be in your future.
8. Not Looking at a Shorter Loan
Mortgage rates are really low. In fact, the rates on 15 year loans are well under 3%. If you have good credit, you should not be afraid to have the bank look at shortening your loan term. Sure this will increase your payment by 30% or so, but if you can swing it, you will save tens of thousands in interest over the years.
9. Not Keeping Tidy Paperwork
You may not have taken out a mortgage in 10 years and perhaps you have not kept all your financial records in order. You should rectify that before you apply for a refi. If you do not have all of the loan documents the lender wants when you apply, this can add weeks of delay to your closing.
Things to Remember
Mortgage refinancing with your local bank can be a financially savvy move, but ensure that you do not make these critical mistakes. In that way, you can realize the greatest financial benefit for your family.
Recent Home Equity Articles Worthy of Reading:
Learn How to Refinance for a Better Interest Rate.
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