5 Costly Mortgage Refinancing Mistakes to Avoid
Posted on November 26, 2009 in the mortgage refinance category
5 Costly Mortgage Refinancing Mistakes to Avoid
Mortgage refinancing has several great benefits if used properly. But if you made just a lapse of judgement, you might be in for a costly mistake and may place your entire house at risk. Here are 5 costly mortgage refinancing mistakes you must avoid.
Mistake #1: Not locking in your rate
Rates are very erratic. It can change while your loan is being processed. So if you did not lock your interest rate in, you might be given a different rate from what you’ve expected. Ask your lender to lock in the rate you are satisfied with, place it into writing and confirm it when the processing of your loan is done. Take note: lenders will not lock in your rate without your request.
Mistake #2: Not shopping around
There are hundreds of mortgage companies out there. Each may provide the same service but they are unique from one another. This is why you have to shop around to get the best rates. It may sound like comparing apples to apples but the truth is, even apples are different from one another. Spend some time comparing different companies. Do not hesitate to ask for the best rates. And if you feel you are not getting what you deserve, then move on and go to another company.
Mistake #3: Refinancing too often
While refinancing is a good way to take advantage of lower rate and thus save money on monthly fees, it is not good to take it every time the rate falls down a notch. Remember that terminating your existing loan and buying a new one involve fees. Closing costs will pile up which really defeat the purpose of refinancing.
Mistake #4: Not computing your break-even point
Again, there is a price to pay to terminate your existing loan and getting a new one, but far too many occasions where homeowners fail to recognize this.
Computing your break even point is simple. For example, your monthly savings for refinancing your mortgage is %200 and your closing cost is %2000. Divide the closing cost by monthly savings and you will get the break even point (%2000/%200). In this example, it will take you 10 months to recoup the cost of refinancing. In other words, you have to wait 10 month before realizing the savings. This is also connected to #3.
Before ‘re-refinancing’ your mortgage, you should know first if you have recoup the cost of your previous loan. Determining your break-even point will also determine how long you will have to stay in your home before starting to get savings.
Mistake #5: Refinancing just for the heck of it
Many homeowners believe that when the rate is low, it is time to refinance. This is wrong! There are other conditions to determine if it is the right time to refinance your home and not just by looking that the prevailing rate. Never refinance if you don’t plan to stay at your home after a year or two or before you reach the break-even point.
Never refinance if you have been paying for your current loan for several years or if you have only a few years left to pay for your home. Never refinance if you have a bad credit score or if the current market value of your home is low. And never refinance if you have already used up all the equity of your home.
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27 Responses to “5 Costly Mortgage Refinancing Mistakes to Avoid”
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Sometimes the mistake made by ourselves can create dangerous situation, at that time we can’t handle the situation and comes in more tense!
These are essential facts that need to be reminded for the one who choose for Mortgage Refinancing.
Nice advice.. Especially Mistake #5: Refinancing just for the heck of it. I’ve done it before. But me and my friends always think that when the rate is low, it is time to refinance. bad bad move…
Great points. I find that many people shoot right for the rate and thing that tell the whole story. Closing costs have to be factored in to determine how long you would have to hold you mortgage before you start saving money and many lenders will show you the same rate but the points and closing costs could be different by a thousand dollars or more. Making sure you are looking at apples to apples by comparing rates from a few different lenders can save you big in the long run.
In your opinion, do the refinancing pros overlap the cons, or is it more dangerous to do it and one should avoid it in general terms?
Hello, I bought a house for cheap and now the value is high, will it keep getting higher or is there a chance the value suddenly drops?
A great article on Mortgage Refinancing. Thank you for this.
Interesting topic. One of my friends has a house-loan where he actually does not pay off any value, but only interest. This is in Denmark. I was wondering if you have it also and what your experience is with it in the long run – is it like peeing in your pants to keep warm.. – does it get cold?
Thanks for showing for the detailed information in such a manner and hard to find information which you had advice here! I really appreaciate……..
i must admit i did learn a couple things that i probably wouldnt have thought of. time to look further into this
i’ve considered refinancing and wasnt sure if it was the right thing to do. now i think i got a better grip on it
Great advice for the investors, but the good advice is break even point. It is basic tool for measuring the profitability situation.
An inexperienced person really faces difficulties while refinancing his mortgage. These tips should be taken in mind before going to do so.
I’ll go as far as saying that not locking in your rate is by far the number one mistake you can make with your mortgage!
excellent blog and having valuable information. Thanks for posting..
The ‘break even point’ is very important. I have seen lots of homeowners refinance and then sell their homes a year or two later before their ‘break even point’. Know how long you will keep your home before deciding to refinance and before deciding to choose between a fixed rate or ARM.
Great Post! there are some really bad moves to be made on a mortgage. I especially think #5 refinancing for the hell of it. Usually not worth it.
It’s SOOO important to consider the costs before refinancing to really determine if it’s a good plan or not.
Very good advice. My friend mortgaged his house with the first company that his real estate agent advised. Now hes paying much more than he could have if he would have shopped around. Thats gonna be a mistake he lives with for the next thirty years. sad..
perfect primer- refi when it makes sense, and how to tell if it makes sense.
I think that people just cheat
Good post!
Keep up the good work:)
“I think that people just cheat”
Ive seen some people pretend to be doctors in order to get a mortgage!
You can refinance yourself right out of your house. Usually the fees will run $3000 or more. Often it will take years to pay down the mortgage to the same level that you owe now. Sometimes you can call your current lender and ask for a rate reduction. Then you won’t have all the fees and it may be cheaper.
Mortgage is a big balooooonn
It’s always surprising how many people don’t shop. Many people just go with their local bank and then feel guilty to shop for a better deal. Crazy.
Great post. This will surely help others out there who find troubles regarding mortgage refining.