6 Ways Homeowners Can Avoid Making a Refinancing Mistake Right Now

With many people rushing to refinance their mortgages right now due to low-interest rates, the likelihood of making a mistake that could cost them loads of cash down the line is indeed a reality.

Tempted to jump on the refinance bandwagon yourself? Proceed with caution. Here are six possible pitfalls to steer clear of when it comes to refinancing.

1. Assuming that a federal rate of 0 percent means you can get a 0-percent mortgage rate

The Federal Reserve dropped the federal funds rate to a range between 0 percent and 0.25 percent to boost the economy during the coronavirus pandemic, and many people assumed that this meant mortgage rates also would fall into that range. But that’s not the case. The Federal Reserve interest rate, prime rate and actual rate your lender will offer will differ. The federal funds rate (which is what the Fed sets) is the rate that banks pay to borrow from each other.

While this doesn’t directly affect mortgage rates, it does have a trickle-down effect. The mortgage rate reports released weekly typically compile the average rate for a 30-year loan. There are a lot of variables, however, including where you live and what your borrower profile looks like. Prime borrowers—with the best credit scores and debt-to-income ratios—receive the most inexpensive rates. If you’re not an ideal borrower, meanwhile, your rate likely will be higher. In addition, interest rates have fluctuated during the past few weeks and likely will continue to do so before leveling out. So, prospective refinancers should stay informed and avoid trying to refinance with unreasonable expectations.

2. Jumping on the refinancing trend too late

Because so many people are refinancing, you also might be tempted to do the same. Be warned, though, that it might already be too late. Good news travels fast, and with so many people eager to refinance, lenders have been inundated by the demand and rates have increased.

And it’s not just homeowners who are hoping to score a deal during a dip in the economy. Plenty more homeowners are visiting lenders to prepare for an uncertain future by leveraging equity with cash-out refi to secure a nest egg to prepare for the future. As of March 11, the volume of refinancing applications was up 79 percent from the previous week and 479 percent over this same time last year, according to the Mortgage Bankers Association.

3. Forgetting about refinancing fees

It’s not impossible to get a better rate than the one you currently have. The promise of a lower rate, however, doesn’t necessarily mean you should refinance. A refinance comes with fees and closing costs, and sometimes those fees can make your refinance cost even more than you’d save on the lower rate. The bottom line: Just because your new interest rate might be lower than your current interest rate, it may not make sense to refinance.

You’ll want to take into account how much longer you’ll be staying or keeping your current place, the upfront closing costs involved and ongoing interest savings. If you crunch the numbers and realize that, in the long run, that a refinance will be worth the costs upfront, that’s great! But make sure you know any fees you’re facing so you can make an educated decision.

4. Refinancing too much equity out of your home in a time of uncertainty

While there are many reasons to refinance, you should be cautious if you’re planning to tap into your home equity to consolidate your debt, or to pay for home improvements or other expenses. Refinancing too much equity out of your home could leave you not being able to afford your mortgage payment—

especially if the COVID-19 virus causes any type of economic downturn. If you’re refinancing, even with a lower interest rate, be sure that your new monthly payments make sense for your budget. Before you make any big decisions, remember that rates are low for a reason, and in this time of national and international financial uncertainty, it may be best to play it safe.

5. Expecting to lock in your lender’s quoted rates and fees ASAP

It’s always good practice to lock in your lender’s rate to ensure you’ll be paying what you expect because the rates could vary while you’re in the process of refinancing. This lock may cost a fee. If you’re able to lock in a rate that works for you, you might want to take the opportunity while you can.

6. Shopping for the right loan for too long

Experts warn against falling into a black hole of shopping for the best rate indefinitely, always thinking you can find a better deal. You could end up missing out on an incredible opportunity. Many people track rates as they sink, waiting to pounce when rates drop to their absolute lowest, but that isn’t always the best tactic. Timing the bottom is impossible, so find a rate that makes sense for you and jump on it if you get it.

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