6 refinancing mistakes homeowners are likely to make right now
Between low mortgage interest rates and the coronavirus pandemic sending our economy into free fall, many people recently rushed to refinance their mortgages. But as we all know, rush goes to waste – and a lot of these enthusiastic homeowners made mistakes that could cost them tons of money in the long run.
So if you are tempted to jump on the refinancing bandwagon, do so with caution. To help you understand where the pitfalls lie, here are six mortgage refinancing mistakes to avoid.
Mistake # 1: Assuming a 0% Federal Rate Means You Can Get a 0% Mortgage Rate
In an effort to stimulate the economy amid the coronavirus pandemic, the The Federal Reserve cut the federal funds rate within a range between 0% and 0.25%. A lot of people thought that meant mortgage rates would fall into that range as well. This is not the case, as it happens.
“I think one of the most misunderstood things people are seeing right now is the news about interest rates going down to 0%,” said Ryan wright at Make hard money.
The reason? Wright explains that the Federal Reserve’s interest rate, prime rate, and the actual rate the lender will offer are all different.
The federal funds rate, set by the Fed, is the rate banks pay to borrow from each other. In fact, it doesn’t directly affect mortgage rates, but it does have a ripple effect.
The mortgage rate reports that come out each week typically compile the average loan rate over 30 years. But there are a lot of variables including where you live and what your borrower profile looks like. Best-in-class borrowers, with the best credit rating and debt to income ratio, get the cheapest rates. In the meantime, if you’re not the ideal borrower, your rate will likely be higher.
Plus, interest rates have gone up and down over the past few weeks, and should continue to do so before stabilizing. As a potential refinancer, it’s important to stay informed and not try to refinance with unreasonable expectations.
Mistake # 2: Jumping Too Late On The Refinancing Trend
With so many people refinancing, you might be tempted to do the same. Unfortunately, it may already be too late.
That’s right: the good news travels fast, and with so many people rushing to refinance, lenders have been inundated with demand and rates have gone up.
“We are seeing a large influx of refi applications to capture lower interest rates,” Nicole ruethsays a mortgage lender from Fairway Independent Mortgage Corporation. But it’s not just homeowners hoping to strike a deal during a downturn in the economy. Many more are visiting lenders to prepare for an uncertain future.
Rueth reports that she has seen many homeowners leveraging equity with rescinders, in an effort to secure a nest egg to prepare for the ongoing COVID-19 emergency.
And it’s not just Rueth who has seen the boom in refinancing. As of March 11, the volume of refinancing requests was up 79 percent from the previous week and up 479 percent year-on-year, according to data from the Mortgage Bankers Association.
As the industry was not prepared to deal with all of these requests, many lenders increased rates in order to slow down business.
“Mortgage rates change according to supply and demand and market liquidity” Mike Zschunke, an Arizona real estate specialist says. “The more people who want to refinance or apply for new mortgages, the more rates will go up. “
Mistake # 3: forgetting about refinancing fees
As stated above, it can be difficult to get a good refinance rate now that so many homeowners have run to their lenders. However, that doesn’t mean that it’s impossible to find a better rate than the one you currently have.
But the promise of a lower rate doesn’t necessarily mean you need to refinance.
A refinance will come with a lot of closing costs and costs, and sometimes these fees can make your cost of refinancing even higher than what you would save on the lower rate.
“People should know that just because their new interest rate may be lower than their current interest rate, it may not make sense,” says Roger ma, a certified financial planner. “They need to factor in the length of their stay or current accommodation, the initial closing costs involved, and the ongoing interest savings. “
If you calculate the numbers and realize that in the long run, a refinance will be worth the upfront costs, so much the better!
Just make sure you know the fees you are facing so that you can make an informed decision.
Mistake # 4: Refinancing Too Much Home Equity During Uncertain Times
There is a lot of reasons to refinance, but if you plan to tap into the equity in your home, such as consolidating debt or paying for home improvements or other expenses, be careful.
“We should be concerned that people are refinancing too much equity in their homes and not being able to pay the mortgage payment,” says Odest Riley Jr. from Financière WLM. “This is especially the case if the COVID-19 virus causes any type of economic downturn, which could restrict a homeowner’s ability to meet their financial obligations.”
So if you are refinancing, even with a lower interest rate, make sure your new monthly payments are within your budget. Before making big decisions, remember that rates are low for a reason, and in these times of domestic and international financial uncertainty, it may be best to play it safe, financially speaking.
Mistake # 5: expecting to lock in the rates and fees offered by your lender as soon as possible
Since rates can go up (or down) while you’re refinancing, it’s always recommended that you lock in your lender’s rate to make sure you pay what you expect. This lock may be chargeable.
But with all the volatility in the market these days, locking in rates can be especially tricky. It can be difficult to get a lender to review your application, let alone set a rate, before the rates change again.
If you’re lucky enough to get a rate that works for you, even if it isn’t the best rate you’ve seen, you might want to take advantage of it while you can. Here is more on when to lock in a mortgage rate.
Mistake # 6: looking for the right loan for too long
With today’s online financial tools like this mortgage rate comparison tool, there is no excuse for not getting the lowest rate possible. Still, experts warn against falling into a black hole of buying the best rate indefinitely, always thinking you can find a better deal.
“I have a lot of clients who are too focused on rates or who make a perfect decision on the little details of their loan, so much so that they risk missing out on an incredible opportunity in order to make a perfect decision,” declared Todd Huettner with Capital Huettner.
“A few are in a position where they could save thousands of dollars a year – tax-free, no less – by refinancing, but they’re waiting to start the process. Many of them will be left behind.
Lots of people follow rates as they fall, waiting to jump when rates drop to their all-time low, but Huettner says it’s not the best tactic.
“If you think you can time the bottom, you can’t. You can only be lucky, ”says Huettner. “Find a rate that works for you and jump on it if you get it. »Here is more information about how to buy a mortgage.