Coronavirus has had a profound financial impact on household finances for many Americans. It's also caused the Federal Reserve to reduce interest rates.
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For those looking to save during these troubled economic times, the low mortgage rates available today present a golden opportunity to refinance your mortgage loan into a new one with reduced rates and fees — plus, lower monthly payments.
However, refinancing isn't the right choice in every situation and those considering a new loan to repay their old one should be certain to research their options carefully. You can visit Credible to compare mortgage lenders and see personalized offers within just minutes to ensure you're getting the best deals while rates are low.
But don't forget to do your homework before committing to a mortgage refinance. Read on to find out about three common mistakes that can cost you money.
1. Not shopping around
When you refinance, you don't have to stick with your current mortgage lender. In fact, you can take your pick of any bank, online lender, or credit union that offers you low mortgage rates. To make sure you find the mortgage provider that will charge you the least for your new loan, get multiple quotes from lenders and calculate the total cost.
Credible makes it easy to compare refinance rates and lenders as you can get pre-qualified for a home refinance in just minutes. Shopping around with Credible won't affect your credit score and you can complete the entire refinance process online if you find a lender you like.
2. Not doing the math
Although refinance rates are low right now, that doesn't mean it's always a financially sound choice. You'll need to make sure your credit is good enough to qualify for a loan at a low rate. You can see your personalized rates within minutes — with no impact on your credit score — by filling out some simple information online now.
You'll also need to consider the closing costs associated with a mortgage refi. These costs can run you between 2 percent and 5 percent of the amount you're borrowing, which adds up quickly. If you're refinancing a $300,000 mortgage, you could owe as much as $15,000 in closing costs.
If you lower your payment enough and plan to stay put in the house for long enough, eventually the money you save by refinancing will make up for what you paid upfront in fees.
However, if you plan to move within the next few years, you probably won't get back the money you put out.
Say, for example, you took out a 30-year mortgage for $300,000 in January 2017 at 4.25 percent and you want to refinance the remaining balance to a new 30-year loan at a 3.25 percent interest rate with $5,000 in closing costs. You'd save about $245 on your monthly payments so it would take you roughly 22 months for your interest savings to offset the up-front fees. If you didn't stay in the house that long, you wouldn't get your $5,000 back. But if you didn't move and kept paying your mortgage for 30-years, you'd end up saving more than $25,000 in the long-run.
Some mortgage lenders offer refinance loans without closing fees, but be aware these loans usually come with a higher interest rate. And sometimes it's possible to make your new loan large enough to cover closing costs so you don't have to pay them out of pocket. If you opt for this approach, you'll have to pay interest on closing costs though — which means you'll pay more over time and reduce the savings from refinancing.
3. Refinancing with less than 20 percent equity
If you owe more than 80 percent of what your home is worth, it may be difficult to find a refinance lender. And if you do find one, you'll likely have to pay private mortgage insurance. This costs you money but only protects the lender from losses in case of foreclosure.
If you weren't paying PMI on your current loan but would have to on your new one because property values have dropped or because you're opting for a cash-out refinance loan, this insurance cost could negate any savings that come from refinancing.
Is a mortgage refinance right for you?
While mortgage refinancing can lower your payment if you're struggling, you do need to qualify for a new loan. If you're looking for short-term help because coronavirus has affected your income, consider other mortgage relief options as qualifying for low-interest rates on a mortgage refi might be a challenge without stable employment.
But if your finances are in order and you hope to save on mortgage payments over the long-term, refinancing may just be the best option for your needs. To make your choice, visit Credible today to learn more about mortgage refinancing and to compare rates and terms to see if you can save.