Interest remains historically low. As a result, more and more homeowners are choosing to refinance their mortgages. Locking in a lower interest rate helps borrowers achieve lower monthly payments and add cash to their pockets. However, homeowners should proceed cautiously in order to avoid problems and minimize the related costs. Below is a list of the top five mistakes that homeowners make in refinancing their mortgages.
How Mortgage Refinance Rates are Trending
1. Ignoring Credit Score
One key factor in determining the refinancing interest rate is a homeowner’s credit score. It is imperative that homeowners know their credit score and the various factors that influence it prior to initiating a home refinance. Homeowners can order one free credit report each year from the three main credit-reporting agencies: Equifax, TransUnion, and Experian. Homeowners can then reach out to the credit agencies if errors exist, which could further increase their credit score.
2. Not Updating Home Insurance Coverage
One very important step in the home refinance process is updating the homeowners insurance policy. When a homeowner commits to refinancing their home, they should send their insurance agent the name, address, and phone number of the new mortgage lender so they can appropriately update the insurance policy. If a borrower does not properly update the lender information, then the policy may not respond to the lender in the event of a loss, putting the homeowner at risk. This is also a good time to make sure that the homeowners insurance policy remains accurate and up to date based on any recent changes to the home, such as additions, pets, pool, trampoline, etc.
3. Forgetting to Consider all Fees
The most significant cost in a refinance is the interest cost; however, it is not the only cost. Homeowners must consider the closing costs and potential other costs. It is important to ask the lender to disclose all costs involved so that the homeowner can make a good decision in choosing a mortgage company. Understanding the costs can help homeowners consider how long it will take them to break even on the refinance costs based on their monthly payment savings.
4. Using Current Lender without Shopping
Many homeowners think that their current lender will offer them the best terms, but this is often not the case. In order to compare costs, homeowners should reach out to multiple lenders on the same day if possible, since interest rates vary. Many lender options exist, so it is useful to request quotes from banks, credit unions, and credible online lenders.
5. Not Locking in Mortgage Rates
Given the historically low interest rates, it remains likely that rates will not be this low forever. As a result, homeowners should make sure that their lender locks in their interest rate during the underwriting process. The lender should be able to lock in the rate for some period, such as 30, 45, or 60 days. The borrower should make sure and verify this number in order to prevent incurring an unexpected higher interest rate.
Refinancing is an excellent tool for homeowners to use for improving their monthly budget or accessing cash for home improvements. Understanding the above mistakes may save both heartache and money during the refinance process.