Homeowners have various reasons for wanting to refinance their mortgages. There are some pitfalls that should be avoided if you are considering refinancing. Some problems are out of the control of the homeowner however and can be addressed with mortgage lenders.
Common Mortgage Refinance Pitfalls
The two best reasons for refinancing your mortgage are to lower your monthly payments or to lower the overall term of your mortgage. However, if you do not do your homework, you may be setting yourself up for failure right from the get go. Here are some of the issues you may face:
Lowering monthly payments – Typically, the best way to lower your monthly payments is to get a reduced interest rate. However, one item that is commonly overlooked when you find a lower rate is the loan term. If you have had your current mortgage for 10 years and started with a 30 year term, you only have 20 years left to completely pay off your mortgage. Many homeowners fall into the trap of accepting a lower rate and a longer term. The end result is while their monthly payments may drop, the overall amount they are paying for their home can increase by thousands of dollars.
Shortening the term of your loan – This may sound like a great idea in theory. Instead of rewriting your mortgage to a 30 year term, you refinance into a 15 year mortgage. While this may reduce the overall term of your mortgage, your monthly payments will likely increase significantly, depending on how much you have paid off on your initial mortgage. Should you be laid off, suffer an illness or face other financial challenges, the new, higher payments may be challenging for you to pay every month.
Some quick questions to ask yourself
Before you decide to refinance your home, you should ask yourself some practical questions regarding your potentially new mortgage such as:
How much will I save every month – If you are going to lower your rate by .75% to 1%, it is probably a good deal, provided you are not going to be paying for an additional 5 or more years
How long do I plan to stay in my house – if the answer is five years or less, you may want to hold off refinancing your home
How much time am I taking off the life of my mortgage – many homeowners think the only way to reduce the amount of time they are paying on their home loans is refinancing to a shorter-term loan. Instead, consider dividing your monthly mortgage payment in half, mailing the half payments twice a month. Over the course of one year, you will have made two full extra payments (26 full payments instead of 24)
How long does the closing costs take to make up in interest savings- The most important analysis is to determine how many months will it take to make up for closings costs . Tax and insurance escrows should not be included in this calculation.
If you are uncertain if refinancing your home is a good move for you financially, contact Core Mortgage Financial. We will walk you through a full analysis of your current mortgage and help you decide if a different mortgage loan is the best option.