If you are considering refinancing your mortgage there are a number of pitfalls that lead to overpaying. These problems range from not checking your credit before applying to accepting a mortgage that includes Yield Spread Premium. Here are several tips to help you avoid common mortgage mistakes.
I. Carrying Too Much Debt
One of the factors that determine your mortgage rate is your debt-to-income ratio. Lenders compare your monthly income to your monthly debt obligation to calculate a ratio; most lenders prefer that your debt ratio not be larger than 20% of your monthly income. If your debt ratio is higher than 20% you represent a greater risk for the lender and your mortgage rate will be higher. If your debts are too high the lender could simply deny your application. Before mortgage refinancing try and pay down your debts as much possible.
II. Too Low of a Credit Score
Credit scores range from 300 to 850 and the higher your credit score the better your mortgage interest rate will be. If you have poor credit it can be difficult to qualify for a reasonable mortgage loan when refinancing. Poor credit is usually anything below 600; however, you can improve your credit score by paying all of your bills on time and by paying down the balances on your credit cards.
III. Accepting a Mortgage with Yield Spread Premium
Another common problem that results in overpaying thousands of dollars is accepting a mortgage that includes Yield Spread Premium. Most homeowners have never heard of Yield Spread Premium and do not understand how their mortgage company marks up the interest rate for a profit. Mortgage companies and brokers inflate interest rates because the wholesale lender behind the loan pays them a bonus for overcharging you. Once you understand how this markup works you can negotiate when refinancing to avoid paying it and qualify for a wholesale mortgage rate.
You can learn more about refinancing your mortgage while avoiding costly mistakes with our free mortgage tutorial.