Avoid these Refinancing Mistakes

Although rising, interest rates are still at their lowest levels in decades. Many homeowners continue to contemplate the advantages of refinancing their mortgages. However, potential borrowers must remain aware that, if done incorrectly, refinancing could actually end up costing a substantial amount of money when the idea was to save. To help prevent this risk from materializing, here are some common refinancing mistakes that you should clearly avoid:

Failing to choose the best refinance program. There are scores of refinance loans available. The loan that's best for you will depend upon your unique circumstances. For example, in some cases a 15-year term may be better than a 30-year term and vice-versa. Be sure to use our Should I Refinance? Calculator to help you decide which loan is right for your situation.

Not performing a 'break-even' analysis. Remember, a refinance is a new 30-year (or whatever the agreed-upon term) loan. In order for refinancing to make sense financially, you need to know how long it will take until you begin to realize any 'net' savings. A break-even analysis will give you this information. It's achieved by means of the following simple calculation: divide the total price of the new loan (all costs associated with the refinance) by the monthly savings (of the new payment in regard to the old payment). This will give you the number of months that you'll need to stay in the property in order to break even on your refinancing costs. For example, if your total refinance costs were $2,000 and your new monthly payment is $80 less than your old one, then you'll have to continue to reside in the property for another 25 months in order to break even on the costs. Therefore, if you plan to move in, say, two years, refinancing might not be your best financial choice. But if you're going to continue to live in the property for three years or longer, then refinancing would make sense.

Paying too much for Mortgage Insurance. Private mortgage insurance, or PMI, is protection for the lender should you default on your mortgage, and it can be an expensive addition to your monthly loan payment. But PMI isn't required if you have at least a 20% equity stake in your home. If you refinance at less than 80% of your home's value, you shouldn't be paying for PMI. If at all possible, cap your refinance amount below that amount.

Fixed-rate versus ARM. Refinancing is often viewed only in terms of a new fixed-rate loan. But in some cases an adjustable-rate mortgage can actually save you money – even if interest rates rise. Again, it depends on your particular situation, the rate that you qualify for, how long you're going to remain in the house after the transaction, etc.

Not shopping around for other refinance lenders. For the sake of convenience, many people simply refinance with their current lender. This can often be a mistake because the current lender may not have the best rates. Your current lender also may not be able to offer you alternative refinancing programs that are be available. Furthermore, your lender may count on you not taking the time to shop around, and therefore offer you whatever program they want to sell at the rate they want you to pay. So do yourself a favor by shopping around. If your current lender indeed offers you the best deal, then by all means, take it.

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