For the past seven years the US has seen interest rates for home loans consistently below five percent. These rates are unparalleled in our history, but just this week we’ve heard rumblings that the Federal Reserve Bank will start increasing rates sometime before the end of the year which will likely hit the mortgage rates not too long after. This may be the last best time to refinance before these historic rates are gone. Here are 10 mortgage refinancing mistakes to avoid:
1. Failing to understand your creditworthiness
This one number has a profound impact on the lives of anyone who borrows money and many have no idea how it is even calculated. The core contributors are: length of credit history, amount of credit used compared to that available, timely payment (late payments are split into 30, 60, and 90 days late with each category being worse than the previous), and lastly whether or not you have any bankruptcy, collections, judgments, etc. According to fico.com the average American has a credit score of 695, however, only those individuals with scores over 680 typically qualify for the best interest rates. You can learn your credit score for free at a number of sites, but www.freecreditscore.com does not require a credit card, and then when you go to apply you will know what to expect.
2. Not disclosing all information on your application.
The paperwork is extensive, the questions a bit intrusive, but completing it as fully and forthright the first time is going to help establish you as trustworthy. When problems do arise, which happens from time to time, having someone that knows you are honestly trying to be up front with them can only help you.
3. Opening up new lines of credit and/or running up large sums of debt.
Once you’ve begun the application process it is best to avoid doing anything that’s going to impact your credit. Whether opening up new lines of credit, closing ones down, making other significant purchases, or even making new applications can impact your credit. At the beginning of the application process the lender will pull your credit report, this is a snapshot however your credit score is constantly changing. Because your credit score changes all the time, the lender will pull your credit again just before everything is finalized. They are looking to see if there have been any significant changes, if there are, it could cause problems.
4. Overestimating your home’s current value
One of the key metrics that the lenders will look at is what’s called lean-to-value. This is the loan amount divided by the value of your home. Different rates are applied to different loans-to-value, with the best rates typically reserved for loans-to-value below 70%, which means that your loan is less than 70% of the value of your home. The higher the loan-to-value, the higher the rate; however, there are limits to how much you can borrow and each state and lender could be different.
Not all lenders and loan officers are created equal and anyone who tells you different is wrong. Whether you go to a community bank, a mortgage broker, or a national bank you will not want to go into this process blindly. Armed with your credit score, an idea of the value of your home, and how much you owe on your house you should be able to get an idea of the advertised rates online without even needing to have your credit pulled by a lender. This will give you an idea of what to expect when you meet with a lender.