When refinancing a home you do so with the hope that the refinance will help you out financially. You want a lower interest rate, lower mortgage payment, the cash from the equity, or you’re hoping to reduce the amount you’ll pay over the life of the loan. Unfortunately, too often homeowner’s jump into a refinance too quickly and they make mistakes that could have easily been avoided. Here are a few of those house refinance pitfalls you can watch out for.
Skipping Crucial House Refinance Steps
Before you refinance you want to step back for a minute and really analyze a few things. First, your reason for the refinance. Decide how you want this to benefit you, and make your decisions accordingly. If you don’t have a basic idea of what you want, you’ll probably end up with a refinance that doesn’t benefit you as much as it could or, worse, you could end up with a refinance that actually causes you to lose money. Nobody wants that.
You also need to figure out what the fair market value is of your home, so you’ll have some idea of what it will appraise for. A lot of homeowners come to the table looking for a house refinance only to learn that the home does not have near as much equity as they were hoping and the refinance either falls through or doesn’t benefit them the way they hoped. Don’t be one of these homeowners- it’s not a happy feeling. Try to figure out comps for your area and get an estimate of the home’s value.
Choosing Not to Compare Home Mortgages
When you are refinancing you take out a new loan to replace the existing loan. As a result, you will end up with different terms on the new loan than you had on the existing loan. Pay attention to these because this is where most homeowners lose money on a refinance.
To start, you want to compare quotes from multiple lenders and hold them up against your current loan. How do the interest rates compare, what about the closing costs and extra fees? Have you looked at the bottom line after you’ve paid the loan in full? What about the monthly mortgage payment and the new amortization schedule? How do those compare? Every one of these questions needs to be looked at before you make the final decision. A good place to start comparing is by using a refinance calculator. With these calculators you can plug in the numbers from the old loan and the numbers of the new loan and compare them side by side. The results will show you whether you will be saving money or losing money, and how many months it will take for you to recoup the financial burden of the refinance.
It’s an unfortunate but common mistake for homeowners to pay attention only to the interest rate, throwing all the other variables out the window. The interest rate is important, but it is not the end all. You want to look at the amortization schedules for both loans before you lock yourself into one. If you’re wondering why, the answer is simple – on nearly every home mortgage the homeowner pays more in interest during the first five years than he does in principle. After this time, the principle will start to go down a little faster. So if you have had your first loan for ten years and you find a loan that has a great interest rate, but the terms bump you back up to a thirty year loan, chances are you will end up paying more in the long run than you would have if you had just stuck with the first loan. You’ll be paying an additional five plus years in pretty much only interest when you could have been paying down the principle. So pay extra special attention to the bottom line because it will show whether or not this house refinance will actually be worth it.
There are many pros and cons to refinancing a home, the biggest pros being the financial benefits. As a homeowner you want to experience the positive side of the refi, so do yourself a favor and don’t short-change yourself. It’s important to take the time to get familiar with the process, and do your homework. The last thing you want to do is walk away with a mortgage that is nothing like the mortgage you hoped it would be.