With mortgage rates recently starting to retreat from their highs of close to 8%, homeowners may start to consider refinancing in order to save money on monthly payments or possibly change to a shorter term. But they need to be aware of some important considerations before proceeding. Refinancing could actually be a losing proposition, as the fees are like closing on the house all over again. Here are four potential mistakes homeowner clients should know.
Not owning the house long enough
Fees for a refinance are about 2-6% of the loan amount. The break-even point is calculated by dividing the closing costs by the estimated monthly savings. That yields the months needed to stay in the home (or rent it) before making it worthwhile. So a homeowner planning to sell in the near future should probably not refinance.
Not shopping around
It’s easier to work with the bank holding your mortgage, and they may waive a couple of the minor fees that would just be duplicated from your previous closing. But it still may not be the best deal. Even a quarter-point difference in a new mortgage could result in significantly more savings over time. So it’s best to shop around.
Not reviewing your credit
You’ll be getting a new mortgage with a refinance, so of course the bank will check your credit score. You should be aware of it before, not after applying. Have homeowner clients request a free credit report from each of the three major credit bureaus. Lenders usually require a score of 620 or higher, so improving a low score is important.
Not negotiating
Too many people don’t think to try and lower the costs of refinancing when hearing what the cost will be. Lenders want the business, and may be willing to work with you, reducing or waiving some fees, especially application or origination costs. You may even be able to get an appraisal waiver, so don’t be timid when contacting banks.
