Nowadays, fixed rates have dropped to almost the same level or even below the level of variable rates. Looking for a new lender can help your financial situation and lower interest rates and fees, but could also lead to some major refinancing mistakes.
Borrowers start looking somewhere else when their income changes and want to switch from a variable rate to a fixed rate, or the other way around. This could lower your rates, get you more assistance and payment flexibility, or prove to be a bad deal.
Refinancing mistakes you should stay away from
- Taking the first option you get.
- Not having a written confirmation of your new fixed rate before the loan is approved.
- Saying yes to a new lender before calculating all the fees and charges that come with refinancing.
- Not consulting with your actual lender before switching to another one, when it’s possible for your current lender to offer you a better deal in order to keep you.
- Not evaluating your credit rating before applying for a refinancing.
- Getting fooled by honeymoon rates that will automatically increase after a short time.
- Choosing a loan that will raise its value by more than 80% of the property’s worth, which will oblige you to take on an exorbitant mortgage insurance.
- Making a decision based on the direction rates of the moment that might influence fixed or variable rates now, but could easily change after a year.
- Wanting a larger loan comes with the risk of not being able to afford the payments and do more damage to your budget than your current credit.
- Assuming that a new refinancing will also come with better costs and more savings.
- Not taking into consideration the stability of your income.
- Refinancing will turn a small debt into a larger one. You’ll have smaller monthly rates, but a bigger loan that you’re going to have to pay back.
- Rolling small debts into your home loan extends the term you’ll have to pay them. By prolonging them to 30 years, you could end up paying almost 75% interest on them.
What are the reasons for refinancing?
- A consolidation of your debts will lower the monthly rates you’d have to pay for your personal loan, but will greatly increase the overall interests.
- A variable income could be a reason. When you’ve taken the loan, maybe your situation was stable. Now, if you have a variable income, you may not get the same deal. Thus, such a decision could be part of the “refinancing mistakes” category.
- A bad credit rating will lower your chances for refinancing, and in case a lender takes you on, it will probably come with a poorer deal than the one you currently have.
Many people choose hastily or for the wrong reasons and make refinancing mistakes that will cost them more than they’re actually paying. Keep in mind that a new application for a home loan will be inserted in your credit report. So, start by asking yourself if switching lenders is the best choice for you or it will only turn up to be part of the refinancing mistakes that people make.