Got questions about refinancing your home loan? We've asked a panel of home lending experts to provide the answers.
When Should You Refinance Your Mortgage?
Updated: November 2, 2024
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Bill Banfield
Vice President
Banfield joined Quicken Loans in 1999, after holding positions at both MCA Mortgage and Lambrecht Mortgage Co. He is responsible for coordinating all facets of credit risk management, product development, margin management, competitive analysis, pipeline analytics, loss mitigation and execution strategy. Bill earned an undergraduate degree in Finance from Western Michigan University and is a graduate of the Mortgage Bankers Association's Future Leaders Program.
Lee M. Eisenberg
President
Eisenberg started his career in the mortgage business in 1979 as vice president of Margaretten & Co., a national mortgage banking firm. He founded Leading Edge in 1997. Lee has extensive knowledge about all types of mortgages, including conventional, FHA, VA and jumbo loans.
Mari Adam
President
Adam has been a Certified Financial Planner for over 20 years and is a Chartered Retirement Planning Counselor, an Accredited Wealth Management Adviser. She has been an active participant in the financial planning industry, serving as president and director of the South Florida chapter of the Financial Planning Association from 1992-2001 and currently, since 2005.
Why Refinance?
The main reason people refinance is to reduce their monthly payment and take advantage of lower interest rates. What people should also look at is their monthly payment. If they're comfortable with that payment, then maybe they should look for a shorter term with the same payment so they can continue paying what they have been comfortable paying but also pay off the mortgage in a much faster timetable.
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9 Common Mistakes People Make When Refinancing—and How to Avoid Them
Not Shopping Around
If you fail to shop around and compare rates and terms, you could end up paying more than you should. Your refinance will probably be one of the biggest financial transactions of your life, so choosing the right mortgage and the right lender can save you thousands of dollars.
Opening New Credit Cards
If you are in the process of applying for a refinance, don't obtain additional debt. In other words, don't go out and buy, say, a car while a refinance application is pending. Taking on additional debt affects the ratios that lenders use to qualify you for the mortgage. Even if you fail to disclose the new debt, whether it be a credit card or a college loan, the lender will pick it up during the application process, and it will affect your ability to qualify. So once you start the refinance application process, don't apply for any new debt until after you close on the loan.
Not Gathering Required Documents Ahead of Time
Your lender will ask for a lot of documentation, including pay stubs, tax returns, the title insurance policy and more. Start gathering these documents before you apply for a refinance. The quicker you can provide all the necessary documents, the faster and easier your application process will be.
Failing to Get Accurate Quotes on Fees in Advance
Many times the quotes you get on the phone for closing costs are actually estimates because the lender may not be familiar with the particulars of your local area. It's not unusual for closing costs, title insurance premiums and even escrow amounts to be underestimated by lenders.
Choosing the Wrong Term
If you've already been in your home for five or six years, don't extend your term by refinancing into a new 30-year loan. Instead, refinance into a 25- or 20-year loan. Since interest rates have probably come down significantly since you took out the original mortgage, you may be able to keep your payment the same but shorten the term of the mortgage. Refinancing into a new 30-year loan when you have already paid down your mortgage for a number of years will cost you a substantial amount of interest over that term.
Not Paying Attention to the Appraisal Process
In most cases, an appraisal will be required when you refinance your mortgage. Obviously, you want your house to appraise for the highest price possible. That's why it's important to be present when the appraisal takes place and to cooperate and provide information to the bank's appraiser. Appraisers need to know about major upgrades to systems, renovations and additions. The more information you can provide your appraiser that helps him or her value the home as highly as possible, the better.
Failing To Check and Repair Your Credit Prior to Applying for a Mortgage Refinance
The interest rate on your new mortgage will be determined in part by your credit score. To expedite approval of your refinance, review your credit report and clean up any problems you discover.
Misrepresenting Facts on Your Refinance Application
It might be tempting to overstate your income, stretch out how long you've been working for an employer or say that you personally occupy your home when in fact you rent it out. Don't. Misrepresentation on a mortgage application is a violation of federal law and comes with hefty penalties. You'll be found out anyway because the lender will verify all information on the application.
Forgetting That Your Lender is Not Your Servicer
It's common for loans to be sold on the secondary market, to Fannie Mae, Freddie Mac or to a large bank. The lender that takes your application and manages the loan closing may not be the company you deal with over the life of your loan. When your loan is sold, you start a new relationship with the loan servicing company.
About Christopher Boston
Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.
Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.