Holiday shopping is in full swing and Christmas is less than three weeks away. If you’re in the process of or are planning to refinance your mortgage you should know that splurging at the holidays could wind up costing you that great mortgage rate. Here are several tips to help you avoid costly mistakes around the holidays that keep you from getting a better deal from today’s best mortgage lenders.
Your credit score decides your refinance rates
Are you considering refinancing this year and haven’t checked your credit score? You’re already making one of the most common mortgage mistakes. If you find the refinance rates that you’re being quoted you are higher than what lenders are advertising the likely culprit is your credit score.
You can check your credit reports for free by visiting the government mandated website AnnualCreditReport.com. If you want a credit score to go with your credit reports that will cost you. If you’re already working with a mortgage broker they should be able to tell you your credit score.
Is your credit score less than 720? You’re not going to qualify for the lowest refinance rates lenders are advertising. The quickest way to boost your credit score is to pay down the balances on your credit cards below 30% of your limit. This is there area where people do the most damage Clark Griswold style during the holidays.
Refinancing your home Clark Griswold style
Remember Clark Griswold in Christmas Vacation?
We’re gonna press on, and we’re gonna have the hap, hap, happiest Christmas since Bing Crosby tap-danced with Danny ^#@$*%& Kaye!
Here’s a Clark Griswold-esk scenario you’ll want to avoid this holiday season. You have good credit and a favorable loan-to-value ratio and qualify for the lowest refinance rates you’ve seen lenders advertising. You’re working with a mortgage broker that promises smooth sailing, the only catch is the mortgage refinance backlog is pushing sixty days. No worries right?
You finally get into the holiday spirit and decide to splurge a little since it’s been such a great year. You’ve got great credit and some of those holiday financing offers are too good to pass up. The second week of January you get a phone call from your broker with some disturbing news.
Because of all the credit card debt you’ve racked up including those store charge cards during the holidays your credit score took a 30 point hit. Your lender’s best refinance rates are no longer on the table thanks to your new credit score.
You can still close on your new home loan but that holiday shopping spree cost you the low refinance rates you were promised. Determined to get the lowest refinance rates you agree to pay two discount points at closing. On a $100,000 mortgage one discount point is 1% of your loan amount. In this scenario that holiday shopping spree ended up costing you $2,000 unnecessarily. Remember points are paid in addition to the normal closing costs you’re already paying.
Paying discount points for refinance rates you would have qualified for if you hadn’t gone shopping means it’s going to take you that much longer to break even recouping closing costs.
Refinancing is all about what you pay at closing
The way you recoup closing costs when refinancing is by lowering your payment. The more you pay out-of-pocket including unnecessary discount points the less benefit you’re going to get from refinancing.
You can approximate the amount of time it’s going to take you to break even by adding up all of your out-of-pocket costs including those pesky discount points and dividing by the amount your payment goes down after taxes and insurance. This tells you the approximate number of months it’s going to take to get your money back.
If you sell or refinance again before breaking even you’re going to be losing money no matter how much your interest rate goes down.
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