Mortgage refinances can assist with several personal finance situations such as provide extra cash to repay old debts, make home improvements, or start a retirement fund. Before completing the application for a new home loan and signing your name to loan documents, consider four common refinance mistakes.
1. Assuming a Refinance Will Lower Payments
Each mortgage refinance varies. Depending on the type of loan chosen, and what a homeowner opts to do with their home's equity, the monthly mortgage payment may increase. Several loan commercials advertise, “refinance today, and lower your mortgage payment. " When a current loan balance is refinanced for another 30-year term, or the borrower is approved for a lower rate, the mortgage payment can drop. On the other hand, if the borrower chooses to borrow money from their equity and refinance a higher amount, mortgage payments increases.
2. Failure to Lock the Loan Rate
Mortgage interest rates change daily. If a lender were to approve your refi application today, the loan closing might occur two or three weeks later. During this time, rates could shift, wherein borrowers no longer quality for the same low rate. Homeowners should inquire about a loan lock. This procedure locks the quoted rate for 30 ñ 60 days.
3. Switch to an ARM or Interest-Only Loan
Refinancing a fixed rate loan into an interest-only or adjustable rate mortgage is injudicious. Rates steadily increase, and a fixed rate home loan is the only way to attain predictable payments. Adjustable rate and interest-only loans offer short-term benefits such as lower rates and payments. However, because these rates are “subject to change, " home loan payments might increase every year.
4. Accepting a Prepayment Penalty
Accepting a temporary prepayment penalty may lead to a better interest rate. This is great for buyers who anticipate staying in their home for several years. On the contrary, if you expect a move within the next one or two years, don't agree to a prepayment penalty. Ask the lender to waive the penalty, or request a soft prepayment penalty. A soft penalty only applies to a refinance and lets the homeowner sell the home without paying additional costs.
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