Mortgage rates are historically low, according to the Washington Post, but won’t stay that way forever. If you bought a home within the last five to seven years and you’ve built up equity, you might be thinking about refinancing.
A refinance can lower your payments and save you money on interest, but it’s not always the right move. In fact, these three mistakes could end up costing you in the long run.
3 Biggest Mortgage Refinancing Mistakes
Mistake #1: Skipping out on Closing Costs
When you refinance your mortgage, you’re basically taking out a new loan to replace the original one. That means you’re going to have to pay closing costs to finalize the paperwork. Closing costs can range from 2% to 5% of the loan’s value. On a $200,000 loan, you could pay $4,000-$10,000.
No-closing-cost mortgages are available, but there is a catch. To make up for the money they’re losing up front, the lender may charge you a slightly higher interest rate. Over the life of the loan, that can end up making a refinance much more expensive.
Here’s an example to show how the cost breaks down. Let’s say you have a choice between a $200,000 loan at a rate of 4% with closing costs of $6,000 or the same loan amount with no closing costs at a rate of 4.5%. That doesn’t seem like a huge difference but over a 30-year term, the second option could cost you thousands more in interest.
Mistake #2: Lengthening the Loan Term
If one of your refinancing goals is to lower your payments, stretching the loan term can lower your cost each month. However, you could pay substantially more in interest over the life of the loan.
If you take out a $200,000 loan at a rate of 4.5%, your payments could come to just over $1,000. After five years, you’d have paid more than $43,000 in interest and knocked almost $20,000 off the principal. Altogether, the loan would cost you over $164,000 in interest.
If you refinance the remaining $182,000 for another 30 year term at 4%, your payments would drop about $245 a month, but you’d end up paying more interest. And compared to the original loan terms, you’d save less than $2,000.
Mistake #3: Refinancing With Less Than 20% Equity
Refinancing can increase your mortgage costs if you haven’t built up sufficient equity in your home.
Generally, when you have less than 20% equity value the lender will require you to pay private mortgage insurance premiums. This insurance is a protection for the lender against the possibility of default.
For a conventional mortgage, you can expect to pay a PMI premium between 0.3% and 1.5% of the loan amount. The premiums are tacked directly on to your payment. Even if you’re able to lock in a low interest rate, having that extra money added into the payment is going to eat away at any savings.
The Bottom Line
Refinancing isn’t something you want to jump into without running all the numbers. It’s tempting to focus on just the interest rate, but while doing so, you could overlook some of the less obvious costs.
FOUR Reasons NOT To Do a Mortgage Refinance: Don’t Make These Costly Mistakes // With record low mortgage interest rates, there is a surge of homeowners doing a refinance home mortgage. HOWEVER, a refinance of your mortgage isn’t for everyone. In this video, I share refinancing mortgage pros and cons as well as how to refinance your mortgage the right way. I also give a brief real estate market update with a reminder about a new fee for those who are thinking about going through the mortgage refinancing mortgage process.
WeBull Promotion: For a limited time, get 2 FREE Stocks (promotion ends Sept 1st): https://act.webull.com/kol-us/share.h… Videos like these take me hours to make due to all the research about the real estate market 2020 (and Youtube is not my full time job) so I hope you appreciate this housing market 2020 update as well as this real estate 2020 report from a licensed CPA (#103885) and Sacramento real estate agent (DRE #01923240). Comment below: are you thinking about refinancing your mortgage? Or have you already taken advantage of the current real estate market and refinanced already? If you have refi’d already what interest rate did you get? Please comment below! *** Jason Walter (Sacramento Realtor/Sacramento real estate agent and native) DRE #01923240 Realty ONE Group Complete firstname.lastname@example.org Follow me on Instagram ➜ @SacramentoRealtor *** FREE Sacramento Area Home Buyer Guide ➜ https://bit.ly/2YjUnTJ *** FREE Sacramento Area Home Seller Guide ➜ https://bit.ly/2x1uqZF ➜➜➜ SUBSCRIBE FOR MORE VIDEOS ➜➜➜ To never miss a video about personal finance & real estate related topics, please subscribe to my channel & then hit the bell notification here ➜ https://bit.ly/31kAR73 More of My YouTube Videos: Why Aren’t Home Prices Dropping? Housing Market 2020 https://youtu.be/_n4P7eUzQlM BEWARE – Why I Cancelled My Mortgage Loan Forbearance Offer https://youtu.be/7ovaZw9m60c Mortgage Loan Forbearance Update (5 MAJOR CONS of Mortgage Loan Forbearance & More): https://youtu.be/eGiOLh-Ly40 Real Estate Market Crash Coming? California Housing Market UPDATE: https://youtu.be/eIquaC0gmFI Housing Market Crash 2020? What EVERYONE Needs to Know: https://youtu.be/rjsOnJF_538 How to Apply for the $10k SBA Disaster Loan – Stimulus Package: https://youtu.be/u_Ww86WmZAw What To Do With YOUR Money RIGHT NOW: Personal Finance: https://youtu.be/f8hhkgWV5Q0 Real Estate and COVID-19: https://youtu.be/VHf0MqOgUjc DEAL REACHED: $2 Trillion Coronavirus Stimulus Package: https://youtu.be/g4pJCaV0E34 ➜ PLAYLIST: Videos about Living in Sacramento https://bit.ly/2TkXZSh ➜ PLAYLIST: My 5 Favorite Areas Near Downtown Sacramento: https://bit.ly/2FNHTbT ➜ PLAYLIST: Fixer Upper videos HERE ➜ https://bit.ly/3aGUTNS Moving to Sacramento? Top 10 Reasons to Move Here: https://youtu.be/LHfCyvnSR1w Where to Live in Sacramento CA: https://youtu.be/Xhcb28wjuic 5 Pros & Cons of Living in Sacramento: https://youtu.be/4xVgRZ4alDY Unexpected Ways to Use Your Real Estate License: https://youtu.be/BHviM61p5Ow Why You Should NOT Buy a House: 5 Reasons: https://youtu.be/aTjcCglFfNI 5 Things EVERYONE Should Do When Buying a House: https://youtu.be/M4Thg6NXC74 Royalty Free Music from Bensound