Homeowners may choose to refinance their properties for various reasons. These can include taking advantage of lower interest rates, securing shorter loan terms or cashing out some of their home equity.
However, the process of refinancing a property can be challenging and if not carried out correctly, may lead to potential complications and legal pitfalls. To help homeowners avoid these challenges this article has outlined some of the mistakes to avoid when refinancing their properties to ensure a smooth and successful refinancing experience.
Focusing on Low Interest Rates
When considering their refinancing options, many homeowners mistakenly focus on securing the lowest interest rates they can without taking into account their total costs over the long term. Homeowners should assess other factors too such as the duration of the loan and other expenses. For example, a loan may have a high rate of interest but a shorter term over which repayments need to be made. The overall costs of this loan could be lower than a low interest loan with a longer repayment term.
When calculating the total cost of refinancing it is also important to factor in all related expenses such as lender fees, escrow fees, closing fees and insurance and taxes. Ignoring these costs and focusing solely on low interest rates could result in a poor refinancing choice. If you are looking to refinance your Ottawa home, this Ottawa real estate lawyer can help you navigate the refinancing process with ease, aligning with your financial goals.
Not Shopping Around
Many homeowners may opt for refinancing with their current lender. While this option can be convenient and avoid the need to fill out paperwork or submit documentation, it may not offer them the best refinancing deal on the market.
Shopping around can offer borrowers more competitive terms than those presented by their existing lender so it pays to get quotes from various lenders before making a decision. Online comparison sites are a good resource to use when comparing interest rates, fees and other loan terms, helping homeowners achieve valuable savings over their loan term.
When evaluating their options, borrowers should also focus on the comparison rate, if listed, rather than the interest rate. This is because the comparison rate includes the rate of interest, and any refinancing-related fees and expenses. As a result, borrowers can ensure they are getting the best deal they can while getting a clearer indication of the true cost of refinancing their property.
Ignoring Your Credit Score
One of the most important factors mortgage lenders and banks consider when deciding whether to approve a refinancing application is the borrower’s credit score. A high credit score will typically lead to lower interest rates and loan terms compared to a low credit score. In some cases, applications from borrowers with poor credit scores will be denied.
As credit scores can change over time and can also contain incorrect or outdated information, borrowers should ensure they check their credit details before refinancing their properties. By requesting and reviewing their credit report, borrowers can ensure the information in their is accurate and notify the relevant credit agency to resolve any errors or discrepancies.
Since most loan applications need a minimum credit score to be approved, borrowers with low credit scores may wish to wait before applying to refinance their property in order to improve their loan terms and chances of being approved.
Neglecting Break-Even Point
Borrowers should consider how long they intend to stay in their properties for refinancing to be a cost-effective option. By moving out before a certain point of time, known as the break-even point, borrowers may not recoup the costs associated with refinancing. The break-even point is the time it takes for the savings from the lower monthly payments to exceed their upfront refinancing costs. If homeowners plan to sell or move out before reaching this break-even point, they might not save that much money or may even lose money overall.
The break-even point can be determined by dividing the total cost of refinancing by the monthly savings achieved over the loan term. For example, if the total cost of refinancing is $2,700 and the monthly saving is $150, the break-even point would be 18 months ($2,700 ÷ $150). For refinancing to be cost-effective, the homeowner would need to stay in the property for at least a year and a half.
By considering these factors, homeowners can avoid the pitfalls associated with refinancing their properties.
