After a troubling couple of years plagued by a global pandemic, rising inflation, and economic woes, more and more people are struggling financially.
The cost of living (which takes into account food, housing, and education) has increased by 2.3% over the past year alone, according to the Bureau of Labor Statistics’ Consumer Price Index, with many households across the U.S. feeling the burden.
Nearly half of Americans (47%) say the higher cost of living is the greatest threat to financial security, feeling that rising everyday expenses threaten their long-term financial health, CNBC reports.
Naturally, this has led many homeowners to consider refinancing their mortgages — in an attempt to either lower their interest rate, consolidate debts, or use the equity in their property to cover other large expenses.
But despite its many benefits, the mortgage refinancing process can be a challenging undertaking.
Basically, when you refinance your mortgage, you will be replacing your existing mortgage with a new one with new terms and conditions.
This could present you with the opportunity to lock down a lower interest rate or get extra cash.
It’s not the quickest or easiest endeavor though, and homeowners can overlook some critical aspects when refinancing their mortgages — which might cost them dearly later on.
That’s why we thought it would be a good idea to take a closer look at the most common mistakes homeowners make when refinancing and point out some of the biggest pitfalls of the process.
Disclaimer: Please note that the content provided here is for informational purposes only, and meant to give you a ballpark idea of what to avoid. We highly recommend consulting a financial advisor or a mortgage broker for advice tailored to your own situation if you decide to move forward.
Common mistakes homeowners make when refinancing their mortgage
#1 Homeowners may fail to shop around during the refinancing process.
Oftentimes, people stick with their current lender even though there are better offers in the industry.
Doing your due diligence on mortgage providers, asking for quotes from several different institutions, and consulting advisors from both leading and smaller providers can help you identify and lock in the best rates available to you.
#2 Trying to time mortgage rates, similar to how a shareholder may track their stocks, is not the wisest move either.
Rates are constantly fluctuating, so trying to lock down a low rate today may come back to haunt you tomorrow.
#3 Many homeowners also focus all of their attention on the interest rates without looking at the bigger picture.
This can cause problems, as many other fees and costs are not considered.
For example, you also need to calculate credit report charges, points calculations, loan origination fees, closing fees, administrative costs, and interest.
#4 Refinancing frequently is also a mistake that should be avoided.
Refinancing costs some money. Expect to pay about 5% of the loan balance in closing charges every time you refinance. If you frequently refinance, your loan balance may rise from the additional closing fees, defeating the purpose of refinancing in the first place.
#5 Failing to save enough money will also cause problems down the road.
For instance, if you paid about 5k in closing fees and saved about a hundred dollars a month via mortgage refinancing, your break-even point would be fifty months, a little over four years.
However, if you only manage to save fifty dollars per month via refinancing, it will take you nearly a decade to reach the break-even point, by which point you may have already moved to another home.
Moreover, cashing out too much home equity may also cause problems, especially if housing prices drop dramatically and unexpectedly.
What you should do before refinancing
First things first: you need to be aware of what your credit score is.
You should also get a home appraisal to determine the current value of your home. The whole idea is that you should have a very good understanding of how much home equity you have and how the refinancing process works before you proceed.
Making upgrades to your home will increase its value and curb appeal, provided they are smart upgrades that do not break the bank.
Closing costs are also something to consider strongly. The interest rate is not the be-all-end-all, contrary to popular belief.
Lastly, you should contact a mortgage broker if you need help with the refinancing process. Their expertise will help you navigate the process more confidently, and you will feel more confident about the choices you make along the way.
How does refinancing affect your credit score?
Refinancing may allow you to lower your total debt amount and monthly payments, which are things that most lenders look for.
However, it may hurt your credit score for a few months since it will lead to a hard inquiry on your credit report.
A hard inquiry is when a lender goes over your credit report to determine if you are a suitable borrower. When multiple lenders make multiple hard inquiries, your score will take a hit.
To avoid this problem, you can try sending out all of your applications within a period of two weeks to help reduce the impact of the hard inquiries on your credit score.
Remember that you will be closing an account to make way for a new account when you refinance your mortgage. Your superb track record will cease, and you will incur “new” debt via the refinance.
It will take some time to rebuild your record.
The pros of refinancing are myriad
Refinancing is not for everyone, but it does have some benefits when you use it to your advantage.
It may allow you to obtain a lower interest rate on your mortgage which can save you thousands and reduce your monthly expenses.
You can also alter the length of your mortgage to a shorter or longer-term depending on your financial status. You can also opt for a variable-rate or fixed-rate mortgage, depending on which you prefer.
It would also allow you to tap into the equity you have accrued over the years to access certain financial products that you could not obtain when you first received your mortgage.
If you have any doubts about refinancing, you should speak to a financial advisor or a mortgage broker. Mortgage brokers usually do not charge anything for their services and will have access to certain lenders and financial products that banks do not offer.
You should perform the necessary due diligence to learn more about the various lenders in the market to make an informed decision.