If you’re considering mortgage refinancing with one of today’s best mortgage companies like USAA Mortgage Rates, you might want to have a look at these common mistakes to avoid leaving cash on the table. According to the HUD Secretary not doing your homework before refinancing is responsible for millions of American homeowners overpaying thousands of dollars for their home loans. Here are two common mortgage mistakes you’ll want to avoid when refinancing your home.
Refinancing Your Home Too Often
Refinance rates have hovered near sixty-year lows for several weeks now; if you’re still paying six percent or higher on an existing home loan you’re waiting too long. Many homeowners experience tunnel vision when it comes to getting the lowest refinance mortgage rates; they want the lowest interest rate no matter what, engaging in serial refinancing trying to keep up with the Joneses.
The problem with serial mortgage refinancing is that taking out any home loan costs money. You’ll have to pay the origination fee and other closing costs. If you’re not allowing enough time to recoup your out-of-pocket expenses before refinancing yet again, you’re losing money no matter how low interest rates drop. To put this into perspective, refinancing costs anywhere from three to six percent of your loan amount, depending how savvy you are on avoiding lender fees and markup.
Is mortgage refinancing a good idea in your situation? As long as you’re able to break even recouping your out-of-pocket closing costs before selling or taking out another home loan, then it probably does make sense. Serial refinancing just piles on your out-of-pocket expenses; making it difficult and even impossible to break even recouping these fees.
Choosing a Longer Term Length
Term length is the amount of time you have to repay your home loan and along with your interest rate determines your payment amount. Most people automatically opt for a 30-year mortgage when refinancing; considered a mistake by many financial advisors. If you refinance with a 30-year mortgage you’re resetting the clock on your loan amortization, meaning you’ve dramatically slowed the rate you’re building equity in your home.
Take a look at the loan amortization table for your home you’ll see that in the early years the majority of your payment goes into the lender’s pocket as interest. Gradually over time, this shifts with more of your payment going to pay down the principal loan balance. Every time you refinance you reset the clock on your amortization and you’re right back to stuffing cash in the lender’s pockets.
If you’re already paying on a 15-year home loan and choose a 30-year term you’ll significantly increase the amount of interest you’re paying for your home. This is a common mistake that effectively negates any savings you’re getting from mortgage refinancing and can literally set you back hundreds of thousands of dollars, even more over the lifetime of your mortgage.
A smarter alternative is to shorten the term length from 30-years. If you’re not comfortable with the higher payment that comes with a 15-year mortgage consider a 20-year term length.
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