Refinancing Do’s and Don’ts
Refinancing your mortgage, or, more simply put, exchanging your current mortgage for a new one, can get you a better interest rate and cut the costs of your monthly payments if done correctly. Refinancing can be a good idea if you plan to own your home for at least another year. However, it can also be risky and end up costing you a fortune in hidden fees if you don’t scrutinize all factors concerning the new lender and the deal he’s offering you. Following this checklist can help prepare you for the refinancing process and alert you of any underlying scams.
DO clean up your credit score. Sometimes the best deals are only offered to those with good credit, meaning cleaning up your score can save you a good amount of money. Ways to improve your credit score include making small purchases from a credit card and paying them off on time, and paying off existing debt.
DO consider a refinancing deal that keeps your monthly payments the same but gives you a shorter mortgage. If you are not having trouble making your monthly mortgage payments, a deal like this means you will be out of debt sooner and wont have as many interest payments to make.
DO calculate and compare all costs. Some lenders may give you a better interest rate but higher closing and settlement costs, which can sour the deal. Plugging in all of the numbers can give you a realistic view of the new deal versus the deal you currently have. While you’re comparing deals, try to get at least three different quotes from three different lenders to give you an idea of current average costs.
DO find out if your current lender will charge you a prepayment fee for paying off your loan early. Some mortgage lenders are charging these fees to make up for the interest payments they planned on receiving during the duration of the loan. The Alternative Mortgage Transactions Parity Act of 1982 allows them to charge such fees.
DO discuss potential loan deals with your current lender before making a final decision to switch lenders. If your current lender is intent on keeping your business, she may modify your loan to give you a better interest rate with low to no settlement costs.
DON’T feel pressured to refinance your home. Many loan sharks will go door to door or cold call homeowners in an attempt to pressure a refinancing loan. Keep in mind that these companies are paying high costs to sell their services door to door or through call centers, meaning they are looking for a high reward, which could be a myriad of hidden fees on your bill. If a deal seems too good to be true, be sure to read the fine print.
DON’T refinance several times with the same lender. If you are using a lender that continually encourages you to refinance your loan, there’s a good chance he’s profiting off of the hidden costs and fees he’s charging you for frequent refinancing.
DON’T be discouraged if your home has experienced a large drop in value, but DO keep in mind that when you refinance, the bank will only loan you what your house is currently worth, not what you purchased it for. Banks gather information about home value by looking at the sale prices of many other homes the neighborhood as well as within your area.