Refinancing can be a great way to free up some of your equity as cash and take care of pressing needs. Refinancing is easily abused though, and when you make mistakes with it, you can end up paying a lot for those mistakes in cold, hard cash.
What are some of the most common and detrimental refinancing mistakes which you should watch out for?
This is perhaps the most important mistake to avoid. A lot of people are in dire straits now because of it, even facing foreclosure. It was quite fashionable in the 90s and even in the early Aughts to “invest” more money in the house through refinancing for home improvement projects.
These projects were intended to inject value into the home which would then result in profit when the homeowner sold the house later. The only problem was that this was essentially a gamble, and after the housing market crashed it became a losing gamble.
In spite of this, even today many people refinance their homes to get the cash to spend on home improvement ventures or other unnecessary expenditures—even costly vacations. As tempting as this can be, you’ll pay for it over the long run in the form of closing costs and other fees. You are more likely to lose money on this kind of investment than you are to profit.
It can be tough to refinance, especially if you have a bad credit rating, and it is often appealing to end your quest at the first semi-reasonable offer you are quoted.
This is just foolish though; it is a competitive market, and chances are that if you shop around more you will be given better insurance rates and terms elsewhere.
Make it clear to the lenders you interview that you are shopping around and looking for the most competitive deal. Let them know if you have been quoted better rates elsewhere to see if they will revise their offer.
If you are thinking of refinancing in order to pay off your mortgage, watch out for pre-payment penalties. Some lenders will charge you a fee if you pay off your mortgage early.
This doesn’t necessarily mean that the fee is so substantial that you won’t still want to refinance, but you certainly won’t want it to be a surprise. So see if you have a pre-payment penalty clause included in your mortgage contract, and then add that to your calculations.
These are just some of the mistakes which people make when they refinance. There are others too, like borrowing more money than you really need, and neglecting to lock in a new interest rate.
Refinancing is a complicated decision, and it is easy to forget to factor in all the important considerations. Refinancing isn’t right for everyone in every situation, but it may be right for you. Calculate everything through with precision and then make your choice.