Don't let the current refi frenzy prompt you to make these expensive mortgage bloopers.
With mortgage rates staying at historic lows, the messaging we're bombarded with is unavoidable—refinance now, or you're leaving money on the table!
But as tempting as it is to rush into a refinance, be careful to avoid some pitfalls and traps that could cost you money in the long run.
Here are some of the most common mistakes people make when they rush to refinance.
Mistake #1. Not Knowing Your Current Property Value
Why is this a big one? Because most homeowners tend to under-estimate their home's current value. This matters because the higher your home's value, the more equity you have in your home. The amount of equity you have in your home can impact both your new interest rate and expenses such as private mortgage insurance, which is required by most lenders if you have less than 20% equity in your home.
Solution: Ask for a comparative market analysis from a local real estate broker, which is typically free, or for a broker's price opinion. You can also opt for a professional appraisal, which typically costs several hundred dollars.
Mistake #2. Not Cleaning Up Your Credit Score
Your credit score directly impacts the interest rate a lender will give you. The better your score, the better the rate—which can save you thousands over the life of your loan. According to the loan credit specialists at Lennar Mortgage, there are three ways you can optimize your score so you're getting the best possible deal:
Correcting missteps. Late payments, unpaid bills, or any errors need to be addressed, disputed, paid, or forgiven. Your mortgage loan credit specialist can help you strategize the best way to prioritize and handle these.
Maintaining a healthy credit balance. Don't open up too many store credit cards, don't carry too large of a balance on your credit cards, and most importantly, don't max out or exceed your credit limits.
Giving it time. Not all borrowers have time, but if you can wait 6 months, you'll have time to address issues such as paying down balances as well as create a track record of positive credit behavior, such as paying above the minimums and paying on time.
Mistake #3 Not Negotiating Refinancing Fees
When you approach a lender for a refinance and they respond with an interest rate, there are also associated closing fees involved. Since these are usually rolled into your new monthly payment, it's easy for these to get lost in the negotiation, but they can be significant—several thousand dollars at least. These include lender charges, third-party vendor fees, title, and escrow.
Some of these are more fixed than others, but you should always negotiate. The better your credit score, the more leverage you may have, so be sure to give yourself time to optimize your score. In addition, doing some comparison shopping gives you leverage as well, and comparing offers and sharing that information with your potential lender may give you a leg up on negotiating the most competitive rate and terms.
As exciting as the idea of saving money on your monthly mortgage can be, make sure you go into the process prepared so you can avoid mistakes that could cost you thousands. The mortgage professionals at Lennar Mortgage can walk you through every step of the refinancing process to make sure you lock in the best rate possible. Talk to one of our refinancing specialists today.