Most homeowners are tempted to refinance once they see a significant drop in mortgage rates. If you purchased your house within the past five or so years and have managed to build up home equity, you’re probably one of these people. Yes, refinancing your mortgage could save you money on monthly payments and interest. That is however if you don’t fall into these refinance pitfalls that could end up costing you more money in the long term.
Stretching Out Your Mortgage Term
If you’re mainly thinking of refinancing to reduce your monthly payments, lengthening your term could significantly reduce your monthly payments, says a mortgage refinance expert at Altius Mortgage Group in Utah. He warns however that you should do the math first since you might end up paying more money towards the interest over the loan’s term.
Opting for a No-Closing Cost Refinance
While this could be a great option, there’s a catch. For your lender to recoup the money they would lose upfront, you might be charged a relatively higher rate. For example, let’s say that you could choose between a loan worth $250,000 with a 4% interest rate and $6,500 closing and the same amount of the loan with zero closing costs, but with a 4.5% interest rate. Although this does not seem like such as big difference, if your loan term is 30 years, you could save more money by going with refinancing deal with closing costs.
Refinancing Without Sufficient Home Equity
If you’re refinancing and your home equity is less than 20%, your lender would require that you purchase PMI or private mortgage insurance to safeguard your lender if you default on your loan. PMI premiums are usually around 0.3% to 1.5% of the loan’s value and would be automatically tacked into your monthly payments. This means that even if you manage to secure a low-interest rate, you might not be able to save that much money because of the PMI premiums.
Bottom line, refinancing is something that you need to think about. You need to do the math and then decide if refinancing is the right move for you. It’s best that you consult your lender to learn more about other options that might be available to you.