Mortgage

The Finest Approach To Refinance: Keep away from These 6 Errors

Reduce your refinancing costs

Starting the mortgage refinancing process can be intimidating.

The goal is to swap your current mortgage for a new mortgage that will allow you to lower your interest rate and build equity faster.

However, mistakes during the process can result in higher costs.

The best way to get refinancing is to know and avoid the most common mistakes.

Six mistakes are the most common in today's refinancing market. Here's how to not make them.

Check your refinancing eligibility (September 19, 2020)

In this article (jump to …)

The best way to get refinancing is to know and avoid the most common mistakes:

Don't optimize your credit score
Comparison shop failed
Using home equity too aggressively
Refinancing Too Often
Don't check your property value
Provided fees are non-negotiable
The best way to refinance a mortgage

1. Don't tweak your credit score

Your credit rating is one of the most important criteria that lenders consider when refinancing.

Increasing your credit score by one point – from 679 to 680 – could lower your mortgage fees by one point. That's $ 1,000 for every $ 100,000.

Clearing bugs with a quick rescore can add up to 100 points to your credit score in less than a week.

According to the Federal Trade Commission (FTC), 20 percent of credit reports contain incorrect information. Five percent are serious enough that they can burden the consumer with a much higher mortgage rate.

Order your credit reports from Equifax, TransUnion, and Experian before you start refinancing. Consumers are legally entitled to one free credit report per year from any major office.

Report bugs immediately. The office must remove any lines that cannot be proven to be yours.

2. Comparison shop failed

A survey by the Consumer Financial Protection Bureau (CFPB) found that nearly half of all homeowners requested a quote from just one lender.

Consumers who received interest rate offers from multiple lenders lower their interest rate by up to 50 basis points (0.50%).

That's more than $ 14,000 in mortgage interest savings on a three hundred thousand dollar loan over a ten year period.

Your current lender or local bank may not offer the best deal. Compare the rates and fees of three to four lenders before you decide on one.

Compare the refinancing rates. Start Here (September 19, 2020)

3. Use home equity too aggressively

According to a recent study, around one in four homeowners is “rich in stocks”.

That means they have at least 50% equity in their home – money that can be used to help achieve other financial goals.

However, a common mistake is financing short-term expenses with a long-term loan.

For example, a five year car cannot warrant a 30 year mortgage loan. Likewise, a mortgage is an expensive way to pay for a month-long cruise.

Homeowners may get more value by investing in home improvement, college education, or a promising business venture with proceeds from a payout refinance.

If your equity is tapped, will it bring long-term returns? If the answer is yes, then a withdrawal refinance may be your next step.

Check your eligibility for a withdrawal refinancing (September 19, 2020).

4. Refinance too often

Mortgage rates are well below their historical norm.

Homeowners who bought a home a year ago can likely save by refinancing at today's interest rates.

Buying refinancing is not always the right decision.

Here's why: Frequent refinancing keeps extending the life of the mortgage.

Remember that after five or ten years refinancing will "reset" the loan, often to 30 years. The rate and payment fall dramatically while bringing little or even negative savings.

Sometimes the lowest possible payment is a priority for a homeowner with limited cash flow. Perhaps a divorce, layoff, or illness has reduced income. In these cases, an extension of the loan could be useful.

However, financially stable borrowers should focus on lifelong savings.

One strategy that many homeowners employ is to refinance a mortgage with a shorter term. 15-year refinancing is growing in popularity

Alternatively, you can make additional principal payments to avoid extending your repayment period.

Check your refinancing eligibility (September 19, 2020)

5. Don't check your property value

A survey by Fannie Mae found that a significant number of US homeowners underestimate the value of their homes – also because they don't know how much home prices have risen in recent years.

Without an accurate estimate of the value of your home, you could easily overpay to refinance the mortgage.

If your estimate is too low, you may overlook potential savings. With adequate equity, you can get mortgage insurance or get a lower interest rate.

On the other hand, if your estimate is too high, you may not get the mortgage rate you want. Less equity can mean higher interest rates.

However, some loan products do not take into account the value of your home.

FHA rationalization refinance does not require an assessment and is available to current FHA homeowners.

Likewise, VA loan rates are not based on the value of the home. Your current VA loan is the litmus test for eligibility. The lender does not usually require an assessment, which saves the applicant the associated fee.

However, if your type of loan requires a documented home value, there are several ways to get a realistic estimate.

The online assessment tools have improved. Better still, request a Broker's Price Opinion (BPO) or Comparative Market Analysis (CMA) from a local real estate agent. The cost, if any, is a fraction of a typical evaluation fee.

6. Provided fees are non-negotiable

You do not have to accept a refinancing offer "as is".

In addition to the interest rates, many fees can be negotiable. Multiple offers can convince lenders to compete for your business.

Third-party fees such as title and escrow may be negotiable depending on the laws of your state.

Assuming you have good credit and have done a little comparative shopping, you should have enough leverage to get a better deal.

The best way to refinance a mortgage

A refinance simply swaps your current loan for a new loan that is better in some way.

Some homeowners refinance to lower their payment or their interest rate. Some refinancing to convert pent-up home equity into the cash you need. Still others refinance themselves over a shorter term, like a 30-year loan into a 15-year one.

Each refinancing is essentially carried out using the same procedure:

Make sure the refinancing benefits you. Know your end goal and see if you can achieve that. If you need a lower rate, make sure current prices are low enough. If you need a withdrawal, make sure you have enough equity
Contact a lender. Yes, this can seem scary, but the law never requires you to refinance. You can cancel the whole thing up to the day before closing! However, a lender can provide you with an accurate quote, check your balance, and send you numbers in writing within minutes
Shop prices. You can cut your interest rate by as much as 0.50% by reaching out to a few different lenders
Make a full application with your chosen lender
Sign initial information that the lender will send you. Check the loan terms in the particulars. Make sure you still achieve your goal (lower rate, payout, short term term, etc.)
Provide documentation to the lender such as income and wealth check
Submit credit terms. The lender will forward your records to the insurer, who will request any additional items you may need
Sign the final documents what the lender is preparing. You sign with the trust company
Wait 3 days. This is the withdrawal period – a "cooling off period" during which you have the option to cancel the refinancing free of charge. (Remember, your current loan is still intact and no changes have been made to it. Just keep making payments.)
Check with the lender on the 4th day. The loan is "funded," which means it is a business deal. Your previous loan has been repaid in full.
Start Paying on the new loan. The first is due 30-60 days after funding

Follow these steps and you should be able to meet your refinancing goals, whether you're saving money, paying off your mortgage faster, or paying off your equity.

Check your refinancing eligibility (September 19, 2020)

What are today's mortgage rates?

Mortgage rates are low and remain below historical levels. Today's interest rates combined with refinancing best practices offer homeowners solid value.

Request a refinance rate today to see how much you can save.

Check your new plan (September 19, 2020)

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