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You can avoid making costly refinancing mistakes with a little research. The two most common reasons for refinances are to either make your loan payments more affordable, or to switch to a different loan structure. In most cases, the new loan rate must be lower than your existing rate in order for the refinance to make sense. You must also make sure the closing costs associated with the new loan are not too high, or the refinance may not be warranted.
Mistake #1: Waiting Too Long to Refinance
If you have an adjustable rate mortgage, or ARM, and you are waiting for interest rates to fall, you may want to consider refinancing to a fixed interest. Compare your existing loan rate with the current rates that are on the market and available to your specific circumstances. If the current rate will lower your payments, waiting for another possible drop in rates can be costly. Interest rates may rise instead, and your existing loan rate could then be higher at your next ARM adjustment.
Mistake #2: Choosing the Wrong Type of Loan
When your current mortgage loan is a one year ARM, you do not necessarily need to refinance to a fixed rate loan. If you are only going to remain in the home for the next three to five years, you might want to consider an ARM loan with a matching term. For example, if you intend to sell your house within the next four years, you could get a five year ARM loan. The rate is fixed for the first five years, and then it will adjust every year after that. The initial five year ARM rate will be lower than a longer term fixed rate, which will make your monthly payment less.
Mistake #3: Failing to Allow for Closing Costs
If current interest rates are lower, you can refinance if the closing costs do not make the total cost of your new loan higher than the original loan. You need to calculate your break-even point on the new loan, to make sure it does not take longer than you intend on staying in the home.
If you are doing a cash-out refinance loan, it can be difficult to calculate the breakeven point since you are adding to the principal amount. You will have to decide if the refinance costs are worth paying in order to get the cash out of your home that you need.
Mistake #4: Not Checking Multiple Sources
Your existing mortgage lender may have been the right choice for your purchase financing, however they may not offer an attractive refinance package, other lenders in your area may be able to offer something better. You should comparison shop in order to find the most favorable loan rate available.
Apply with a few sources at the same time, and then analyze all of the loan approvals to see which one offers the best terms. Remember to contact the lenders that you do not use, and thank them for their time.
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