The Pitfalls of Refinancing
Are you looking to save money in today’s economy?
Refinancing into historically low interest rates is a great place to start, if you want to save money. You can potentially save tens of thousands of dollars over the life of your mortgage loan. You can lower your monthly payment or shorten the life of your loan, depending on your financial situation.
Before you start to shop around for the best mortgage you can find, it’s important to learn about some of the pitfalls of refinancing in today’s mortgage market. Even better, when you learn how to work around those pitfalls, you increase your chances of getting an affordable and money- saving refinance loan.
Pitfall #1: Don’t Shop Around
It is up to you to find a mortgage, compare rates and fees, and obtain an affordable payment. Mortgage rates are attractive and lenders want to make loans. However, a mortgage will not just drop in your lap. Do not fall into the first pitfall and be trapped by inaction.
According to a survey published by the Government regulator, the Consumer Finance Protection Bureau (CFPB), many mortgage shoppers do not shop around. Even more amazing, many shoppers that were turned down in the past just gave up.
It is easier than ever to shop for a mortgage. I encourage all borrowers to get multiple offers and compare mortgage terms. Online mortgage shopping services make it simpler and more convenient than ever to compare mortgage offers. If you have special circumstances, or are finding it hard to be matched with a lender, then do not forget to talk to your local bank, credit union, or a specialized mortgage broker.
Pitfall #2: Not Enough Equity
Housing prices crashed in 2008 leaving millions of homeowners underwater. Some very fortunate borrowers were able to refinance into low interest mortgage rates thanks to the HARP program or the FHA Streamline Refinance, even when they owed more on their homes than they were worth.
Low home prices may have kept you out of the mortgage market in the past, but don’t assume that you will be turned down again.
Home prices are up in many parts of the United States. According to the FHFA Home Price Index published in March 2015,
“From January 2014 to January 2015, house prices were up 5.1 percent. The U.S. index is 3.5 percent below its March 2007 peak and is roughly the same as the December 2005 index level.”
If your home’s value prevented you from qualifying in the past, then now is a good time to see if you have enough equity to allow you to refinance into a low- rate mortgage.
Lack of equity may have made refinancing not worthwhile, even if you qualified for a loan, if the cost of mortgage insurance wiped out the savings from reducing your interest. If your home equity has improved and your loan-to-value ratio (LTV) is 80% or less, you can possibly forgo mortgage insurance payments.
Pitfall #3: Credit Is Tough
Many Americans have credit problems. Sub-prime mortgage lending has all but disappeared since the mortgage meltdown. New mortgage rules, including the Qualified Mortgage Rule and the Ability to Repay Mortgage rule, seriously limited the types of loans that lenders are willing to offer.
However, while sub-prime loans are a rarity, the FHA program offers loans with FICO credit scores as low as 500 (LTV 90% or less) and 580 (LTV over 90%). Conventional loan programs are not as generous, but do allow for a FICO score as low as 620.
While many lenders have tougher requirements than those required by the government agencies, there is a growing indication that many lenders are easing credit requirements. If you had a tough time being approved, or you think that credit is tough, then overcome that pitfall by improving your credit and shopping around with multiple lenders.
Overcome the Pitfalls of Refinancing
Mortgage rates are low, close to all-time historical lows.
You can overcome the normal refinance pitfalls by preparing yourself correctly with a mortgage refinancing checklist. Make sure to check your credit and your home value.
Here are a few more tips:
- Carefully consider the amount of time you are likely to stay in your home. Check out the fees and rates, so that you don’t end up paying large upfront fees for a loan that you may pay off in a couple of years.
- Try not to extend the life of your loan. With lower rates, you should be able to lower your payment and lower the life of your loan. While a 30-year mortgage is a good product if you want to have the lowest payment possible, you can save more money by taking out a shorter-period loan.