Refinancing 101: Explained! – The Do’s & Don’ts

Refinancing means acquiring a new loan from your current or a new lender, to pay off an older loan. Refinancing is popular amongst borrowers in their bid to get lower interest rates or improve their credit scores.

It is regarded as a prudent way to mend the patches in your finances. However, it is worth noting, one too many times, things have gone south with refinancing. It is a serious financial decision and especially when refinancing your house mortgage.

It can save you significant sums of money in interest- thus gaining equity on your house faster- or could raise your mortgage payments and risk foreclosure. You cannot risk throwing you or your loved ones out in the cold, homeless.

Therefore, it is critical to research adequately and understand even the small print as a safeguard against the traps and pitfalls that come with refinancing your mortgage.

Here is an overview of the do’s and the don’ts when considering refinancing your mortgage:

The Don’ts

Don’t Fixate on the Mortgage Rate

One of the biggest mistakes many borrowers make is to solely focus on the interest rates when looking for a mortgage lender. Many factors come into play during mortgage pricing, and a lower refinance rate from one lender might be costly than a higher rate from someone else- a lot higher.

Closing costs vary from lender to lender, and a seemingly lower interest rate might be used to disguise a loan with unusually higher fees.

Before applying for a refinance, be sure to inquire about such things as loan origination fees, credit fees, and other fees you might incur during processing. After finding the best rate, assess whether it fits your monthly repayment plans and then lock in the rate with your trusted lender.

Don’t Send Multiple Mortgage Applications to Different Lenders

It is wise to conduct enhanced due diligence and research to compare available lenders. However, for each application you send, the lender will require a credit report, and each credit report request will leave a dent on your file.

This, in turn, negatively affects your borrowing power. Therefore, you may want to take caution not to send in too many applications to different lenders. It is recommended that you submit only a mortgage application that you mean to proceed with.

Don’t be Sucked in by the Adverts

It is a competitive business in mortgage refinancing, and it is usually big plunder for the lenders to gather. Some lending companies are less truthful and lure unsuspecting clients into horrible refinances that end up costing more than is saved.

They use honeymoon rates that are very low in the first years but may later include hefty fees or charges. Worse still, they may rocket to inconsiderably higher rates later on.

The Do’s

Consider And Compare the Costs

Take your time to carefully compare the cost of refinancing your loan against the value of your existing loans. “The Truth in Lending Act” (TILA) in the federal laws provides that particular uniform disclosures including annual interest rates, total finance charge, and other costs be made to the borrower by the lender.

Do an apple to apple comparison and consider all the costs to be incurred in refinancing your mortgage. Look beyond the interest rates.

Change from Adjustable to Fixed Rate

Adjustable rates are potentially risky. They fluctuate a lot, and although they could go down, they can also get quite high and become unmanageable or inconvenient.

Contact me with any questions, concerns or ideas. No Question is to small!

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