If you are a homeowner who is considering mortgage refinancing, there are a number of costly mistakes that result in overpaying thousands of dollars for your new loan. Doing your homework and researching mortgage lenders will help you avoid 90% of the costly mistakes homeowners make. Here are five costly mistakes you need to avoid to help you on the right path to the perfect mortgage.
I. Not Understanding Mortgage Fees & Retail Markup
It is important to understand how retail mortgage companies and brokers make their money before shopping for a mortgage loan. Remember that mortgage loans are retail products just like automobiles, and just like a car dealer, your mortgage company marks up their products before selling them to you. When you shop for a car if you know the wholesale price of that car you are much better off when negotiating with the dealer over price. The same is true of mortgage interest rates. Find out the wholesale mortgage rate you qualified for and you can avoid paying the mortgage company or broker markup and save yourself thousands of dollars in unnecessary mortgage interest. This retail markup of your mortgage interest rate is called Yield Spread Premium and your number one priority when refinancing your mortgage needs to be avoiding it.
II. Neglecting to Shop Around for the Best Mortgage Offer
Many homeowners jump of the first favorable offer they are approved for without comparing lender fees and closing costs. Mortgage offers are often loaded with junk fees that you can avoid paying if you do your homework, recognize the fee as garbage, and refuse to pay it.
III. Choosing Adjustable Rate Mortgages for The Wrong Reasons
Adjustable Rate Mortgages can save you a lot of money if you use them properly. Many homeowners choose adjustable rate mortgages because they qualify for higher loan amounts. These loans allow them to purchase bigger homes than they would be able to with a fixed rate mortgage. The problem comes when the mortgage lender begins adjusting the interest rate and the payments skyrocket. Many homeowners find they can no longer afford their payments when this happens and risk losing their homes.
IV. Choosing a Mortgage Loan Based on the Interest Rate Alone
The mortgage rate is just one factor to consider when choosing a mortgage. If you neglect to consider loan terms and closing costs you could find that low mortgage rate costing you thousands of dollars in unnecessary fees and penalties.
V. Not Comparison Shopping With The Good Faith Estimate
Many financial advisors recommend that homeowners use the Annual Percentage Rate when comparison shopping for a new mortgage. The Annual Percentage Rate, or APR, is supposed to give you an idea of the total cost of a mortgage loan expressed as a percentage of the loan amount paid each year. The APR is a good starting point for choosing a mortgage; however, it does not give you enough information to make an informed decision as to which mortgage is best for your financial situation. Always use the Good Faith Estimate to perform a line-by-line comparison of mortgage offers before making a decision.
You can learn more about your mortgage refinancing options, including other costly mistakes you need to avoid with the free mortgage video tutorial found on the top of this page.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
