When interest rates dropped to record lows recently, as the coronavirus pandemic began to spread across the United States, many people rushed to refinance their mortgages. But as we all know, haste makes waste—and many of those eager homeowners made mistakes that could cost them tons of money in the long run.
So if you’re tempted to jump on the refinance bandwagon, do so with caution. To help clue you in to where the pitfalls lie, here are six mortgage refinancing mistakes to avoid.
Mistake No. 1: Assuming that a federal rate of 0% means you can get a 0% mortgage rate
In an effort to stimulate the economy amid the coronavirus pandemic, the Federal Reserve dropped the federal funds rate to a range between 0% and 0.25%. Many people assumed that this meant that mortgage rates would fall into that range, too. That is not the case, as it happens.
“I think one of the most misunderstood things that people are seeing right now is the news about interest rates going to 0%,” says Ryan Wright at Do Hard Money.
The reason? Wright explains that the Federal Reserve interest rate, the prime rate, and the actual rate someone’s lender will offer are all different.
The federal funds rate, which is what the Fed sets, is the rate that banks pay to borrow from each other. This actually doesn’t directly affect mortgage rates, but it does have a trickle-down effect.
The mortgage rate reports that come out weekly typically compile the average rate for a 30-year loan. But there are a lot of variables, including where you live and what your borrower profile looks like. Prime borrowers, with the best credit score and debt-to-income ratio, get the cheapest rates. Meanwhile, if you aren’t the ideal borrower, your rate is likely to be higher.
Moreover, interest rates have been going up and down in the last few weeks, and are likely to continue in this way before they level out. As a prospective refinancer, it’s important to stay informed, and not to try to refinance with unreasonable expectations.
Mistake No. 2: Jumping on the refinancing trend too late
With so many people refinancing, you might be tempted to do the same. Unfortunately, it may already be too late.
That’s right: Good news travels fast, and with so many people rushing to refinance, lenders have been inundated by the demand, and rates have gone up.
“We are seeing a major influx of refi applications to capture lower interest rates,” Nicole Rueth, a mortgage lender with Fairway Independent Mortgage Corporation explains. But it’s not just homeowners hoping to score a deal during a dip in the economy. Plenty more are visiting lenders to prepare for an uncertain future.
Rueth reports that she’s seen many homeowners who are leveraging equity with cash-out refis, aiming to secure a nest egg to prepare for the ongoing COVID-19 emergency.
And it’s not just Rueth who’s experienced the surge in refinancing. As of March 11, the volume of refinancing applications was up 79% from the previous week and 479% year over year, according to data from the Mortgage Bankers Association.
Since the industry wasn’t prepared to process all these applications, many lenders hiked up rates in an effort to slow business.
“Mortgage rates move according to supply and demand and liquidity in the market,” Mike Zschunke, a real estate specialist in Arizona, says. “The more people that want to refinance or that apply for new mortgages, the higher the rates will go.”
Mistake No. 3: Forgetting about refinancing fees
As stated above, it may be hard to get a good refinance rate, now that so many homeowners have gone running to their lenders. Still, that doesn’t mean it’s impossible to find a better rate than the one you currently have.
But the promise of a lower rate doesn’t necessarily mean you should refinance.
A refinance will come with plenty of fees and closing costs, and sometimes those fees can make your refinance cost even more than you’d save on the lower rate.
“People should know that just because their new interest rate may be lower than their current interest rate, it may not make sense,” says Roger Ma, a certified financial planner. “They need to consider how much longer they’ll be staying or keeping their current place, the upfront closing costs involved, and the ongoing interest savings.”
If you crunch the numbers and realize that, in the long run, a refinance will be worth the costs up front, great!
Just make sure you know what fees you’re facing so you can make an educated decision.
Mistake No. 4: Refinancing too much equity out of your home in a time of uncertainty
There are many reasons to refinance, but if you’re planning to tap into your home equity—to, say, consolidate your debt or pay for home improvements or other expenses—watch out.
“We should be concerned about people refinancing too much equity out of their homes and not being able to afford the mortgage payment,” says Odest Riley Jr. of WLM Financial. “This is especially the case if the COVID-19 virus causes any type of economic downturn, which could tighten up a homeowner’s ability to keep up with their financial obligations.”
So if you’re refinancing—even with a lower interest rate—make 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, financially speaking.
Mistake No. 5: Expecting to lock in your lender’s quoted rates and fees ASAP
Since the rates could go up (or down) while you’re in the process of refinancing, it’s always good practice to lock in your lender’s rate to ensure you’ll be paying what you expect. This lock may cost a fee.
But with all the volatility in the market these days, locking in rates can be especially tricky. It can be difficult to get a lender to look at your application, let alone lock in a rate, before the rates move again.
If you’re lucky enough to lock in a rate that works for you, even if it’s not the best rate you’ve seen, you might want to take the opportunity while you can. Here’s more on when to lock in a mortgage rate.
Mistake No. 6: Shopping for the right loan for too long
With today’s online financial tools, like this mortgage rate comparison tool, there’s no excuse to not get the lowest rate possible. Still, experts warn against falling into a black hole of shopping for the best rate indefinitely, always thinking you can find a better deal.
“I have many clients who are too focused on rates or making a perfect decision on small details of their loan—so much so that they are likely to miss out on an incredible opportunity in an effort to make a perfect decision,” says Todd Huettner with Huettner Capital.
“A few are in a position where they could save thousands of dollars a year—tax-free, no less—by refinancing, but they are waiting to start the process. Many of them will get left behind.”
Plenty of people track rates as they sink, waiting to pounce when rates drop to their absolute lowest, but Huettner says this isn’t the best tactic.
“If you think you can time the bottom, you can’t. You can only get lucky,” says Huettner. “Find a rate that makes sense for you, and jump on it if you get it.” Here’s more info on how to shop for a mortgage.
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