For homeowners who pay their mortgage loans, refinancing is a viable way to get better payment terms. Through refinancing, you can lower your interest rate, lessen your monthly payment, change to a fixed-rate mortgage, and even get cash loan assistance from your selected mortgage lender.
Refinancing is a good idea if you’re familiar with how it works. Whether it’s your first time to get refinancing or your second, avoid committing these four mistakes:
- Extending your loan payment
Applying for refinancing allows you to get a lower monthly payment depending on the final agreement you’ll have. However, extending your payment longer than your original mortgage could only cost you more. You may think that having a less monthly payment amount per month would help you save up, but if you check the interest charges for the whole duration, you’ll see that instead of saving, you’re only extending your loan balance amortization.
One reason that people consider refinancing is to shorten their payment time or lower their monthly payments. If you belong in this category, one approach is to apply for a short-term refinancing loan. Consider the number of years close to what’s left in your current mortgage. Let’s say you are paying for a 30-year mortgage, and you’ve closed off the eighth year payment, you can apply to refinance it into a 15-year loan or 20-year loan instead. In general, shorter-term mortgages offer lower rates, and refinancing will allow you to have little to no increase in your monthly payment.
- Accepting a mortgage offer with prepayment penalties
There are two common scenarios concerning this issue.
First, the lenders would include a prepayment penalty in their mortgage offer. It means you should pay the penalty if you pay off your mortgage earlier than the agreed schedule. It serves as the lender’s protection if you decide to sell your home or get another refinancing. You’ll usually encounter this setup in those “no-cost refinances” where the prepayment penalty offer will expire after a few years, but the lenders would charge a higher rate to waive the closing costs.
Second, the lender could offer a lower rate to encourage you to agree to a prepayment penalty. Also, some borrowers with poor credit would sometimes be required to accept such to get their loan approval. If there’s no reason for your application to get a prepayment penalty, then it’s best not to consider it.
- Borrowing too much money from home equity
Another beauty of refinancing is how homeowners can cash out their home equity and use it for repairs, investment, and so on. What makes the offer more attractive is how low and tax-deductible the interest is compared to other types of loans.
Before getting too excited and taking out too much of your home equity, remember that there’s still a chance that house pricing would fall, or you’ll boost your mortgage payments further. Either would leave you with almost no margin for error in case any financial problems emerge.
You can take out any amount you need, but make sure to leave a healthy amount to your home equity in case of any financial emergency.
- Falling victim to junk fees
If you carefully observe where your money goes throughout the process, you’ll notice that you also pay for other services apart from the refinancing concerns. There are additional charges, such as title fees, application fees, loan origination, and more. These are all legitimate and part of the process. However, stay on the lookout for unnecessary charges for document preparation and other services. Ensure that they also don’t overcharge for tasks like obtaining credit reports or delivering the document. If you can do some tasks on your own or find someone who will do it for less, consider that instead of paying for more.
Refinancing your mortgage can be advantageous if you know the mistakes to avoid. Beware of these and take note of our given advice to maximize your finances.
If you’re looking to refinance your mortgage in Buffalo, NY, you should consult a financial expert to guide you. Get in touch with us today. We offer only the best possible tools and resources to our clients to better manage their finances.
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