Thursday, 30 July 2020

Mistakes To Avoid When Refinancing Your Home Mortgage

Refinancing Your Mortgage

Just over a year ago I refinance my home, and I had no idea what I was doing. Right now interest rates are crazy low, so I'm looking to do it again. This time around I've done a lot of research, I've calculated a lot of numbers. I realized the first time I refinance my home, I made quite a few mistakes, and I kind of hoped to share with you what I have learned so you don't make the same mistakes that I did.


1. Not Having A Basic Understanding Of Refinancing

I simply just didn't really fully understand what it meant to refinance my home. When you refinance your home, here is what's going to happen. 

You're going to call up your loan officer, your loan officer is going to be super nice, and they will do a hard pull on your credit score, your credit score is going to go down by a few points. In my case, is about five or six. Your loan officer is then going to say whatever they think you want to hear to get you to do the refinance. You will send information to your loan officer, this will happen back and forth, where you sent information, you discuss terms, and eventually, if you decide to go ahead with the refinance, you signed a bunch of paperwork, and you have a new loan. Then you'll pay a bunch of fees that don't really get mentioned, they kind of seem to get swept under the rug as they're kind of put into your refinanced your new loan, and so you don't notice, or I didn't notice so much. That's basically a refinance. And I kind of read about refinance, but one thing I found out is everywhere you read about refinancing your home, is usually from like a lenders website or something like that, and they kinda have the incentive to make a refinance seem amazing.

What I would suggest that you do if you're considering refinancing your home, is getting just a very basic idea. Go to good old Wikipedia, read through the things there 


It's not very long, but this is a really good starting place, just to get you a general idea of what refinancing actually means. 

2. Rely On Loan Officer Without Doing My Own Research.

Completely trusted my loan officer without fully understanding what was going on. The thing is unless you have already a basic understanding of refinancing your home, there's no way for you to know if your loan officers being totally upfront with you or not. Now, I don't think loan officers are ever going to be dishonest or lie, I do think though that they can word things in such a way that they can say what they think you want you to hear, even if it might not be totally in the best interest for you. 

One thing to keep in mind, loan officers they get a commission, their incentive is to make money, and they do that by getting you to refinance your home. So you need to have a basic understanding of what's going on before you can fully trust your loan officer. One way you can kind of gauge if your loan officers being upfront with you is by asking the right questions, and throughout this article, I will be telling you some questions that you can ask your loan officer to kind of gauge how upfront they're being with you, and how much information they're willing to divulge. And by asking the right questions, you can kind of get an impression if they're kind of pushing you towards the refinance, or just there as a resource to really help you out.

3. Not Knowing My BreakPoint 

If you don't know what the break-even point is, basically, when you refinance, there are a bunch of fees involved. From the moment you refinance, you've basically lost all the refinancing fees. They're expensive, they're about 1% to 2% of your loan amount. So on the first day after you refinance you've basically lost that, but over time because your interest rate is lower, eventually, you will get to a point where you're not losing money, but you're saving money. That is what the break-even point. 

I got fees associated with the refinancing nearly $10,000 when I start out, and each month I've lost money, but it gets to a certain point, and for this refinance it was nearly the 5-year mark at this point, I'm starting to save money. But what that means is, if I move out of my house in the next two or three years, I will have lost all the money for fees in refinancing, and it won't benefit me at all to refinance, in fact, it's going to cost me money. The only way doing this refinance will be of benefit to me, is if I end up staying in my house for about five years. So that's something to keep in mind, there is a break-even point with the refinance, you should know what that is, and you should have a good idea in your head of how long you anticipate staying in your house, to know if refinancing is actually worth it or not.

4. I Didn't Consider Alternatives

I didn't really consider any other options, other than doing what I'm doing now or refinancing. The example of this is going back to making the payment the same as if I refinance. I could decide, hey, I'm going to live in this house for just 3 more years rather than refinancing, let me just pay the extra principle. Obviously, you can always pay more principle, and that will end up reducing the amount of interest you pay over the term of your loan. If you have money to pay for the principal, you could just put it all upfront, this is especially a good option if you don't know how long you're going to spend in your house. 





Conclusion

There are definitely other options to refinancing, and you could look into even more things, but those are just some things that I notice. Now that I'm trying to go through the refinancing process again, I realized when I did it the first time I was really dumb because I didn't do enough research. So I hope some of the information I've shared with you here will be helpful to you.

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