With the turmoil in the mortgage industry all over the news, many homeowners are contemplating whether it's still safe to refinance their mortgage. The mortgage industry is not as dead as the media is trying to portray. Yes, lenders are cracking down on their criteria for borrowers; but with decent credit and a reasonable amount of equity in your home, refinancing can often create huge savings just in time for the holidays.
Borrowers must be aware that, if done incorrectly, refinancing could actually end up costing you a substantial amount of money. To help you avoid the mistakes that other borrowers often make, we've compiled a list of some common mistakes that you should avoid at all costs :
Failing to choose the best refinance program.
The loan that's best for you will depend upon your unique circumstances. For example, in some cases a 15-year term may be better than a 30-year term, depending on your situation. Be sure to use our "Am I Better Off Refinancing?" calculator to help you decide whether refinancing is worth your while.
Not performing a 'break-even' analysis.
Remember, refinancing creates a brand new mortgage loan. In order for refinancing to make sense financially, you need to know how long it will take until you begin making back the fees involved with refinancing. A break-even analysis will give you this information. It's achieved by following this simple calculation: divide the total cost of the new loan (fees, closing costs, etc.) by the monthly savings off of your current payment. This will give you the number of months that you'll need to stay in the property in order to break even on your refinancing costs.
For example, if your total refinance costs were $ 1,000 and your new monthly payment is $ 50 less than your old one, then you'll break even in 20 months after refinancing. If you're planning to move before you expect to break even, refinancing may not be your best option. Instead, you may want to consider taking out a home equity loan instead.
Paying too much for Mortgage Insurance.
Private mortgage insurance, or PMI, is protection for the lender in case you default on your mortgage. It can tack on hundreds of dollars extra on your payment each month. However, PMI is not typically required if you have at least a 20% equity stake in your home. If you refinance less than 80% of your home's value (LTV – loan-to-value), you should not be paying for PMI. If at all possible, cap your refinance amount below that amount to ensure that you find the best loan.
Fixed-rate versus ARM.
Refinancing is often viewed only in terms of a new fixed-rate loan. But in some cases an adjustable-rate mortgage can actually save you money – even if interest rates continue to rise. Again, it depends on your particular situation and the rate that you qualify for so be sure to thoroughly discuss your options with one of our lenders to find out if an ARM is the right option for you.
Not shopping around for refinance lenders.
Many people refinance with their current lender simply for the sake of convenience. This can often be their biggest mistake, as shopping around for free refinance quotes can mean HUGE savings in the long run as your current lender may not have the best rates like they advertise.
You should carefully weigh the savings you can earn by refinancing against the possible costs or penalties. Any homeowner can refinance their mortgage; the key is to weight your options to determine if refinancing is the best option for your situation.