Top 5 Mistakes to Avoid When Refinancing Your Home
Refinancing your home may not be as easy as you may think if the mistakes that people make are any consideration. Every year, thousands of people make careless mistakes when refinancing their mortgage, costing them to lose both time and money. If you are thinking about refinancing, avoid these five common mistakes:
Not Knowing the Value of Your Home
Do you know the value of your home? Many people confuse the value of their home with the balance of their first mortgage. Other people are simply too optimistic when it comes to the current value of their house. Keep in mind that just because you bought your house for $200,000 ten years ago, it’s not necessarily valued at that amount today. If you don’t have equity in your home, your chances of getting refinanced are slim. If you don’t know the true value of your home, you can waste time and money pursuing a new loan.
Taking the First Offer
While it may be easier to refinance with your current lender, you may not get the best deal. If your lender gives you the option to refinance, shop around before you take the deal. Chances are high that you will qualify with several lenders if you qualify with one; never neglect to look for a better deal. While it doesn’t mean that you’ll find a better offer, doing your research does mean that you’ll know that you’re getting the best offer possible.
Making Renovations Mid-Stride
Many homeowners decide that refinancing is the perfect excuse to make those renovations that they’ve been dreaming of. While there’s nothing wrong with upgrading your home, there is something wrong with doing it while you’re trying to refinance. Remember that the appraiser will determine your home’s value based on its state on the day of the appraisal, not on what it will look like in the future. If your upstairs bathroom is torn apart and waiting for a new toilet, it can greatly affect the appraised value of your home.
If you took out a 30-year mortgage and have paid on it for 10 years, don’t refinance for another 30-year term. Many people do this and it’s to no one’s benefit but the lender’s. If you want to refinance, look for a term that most closely matches the amount of time you have left on your current mortgage.
For instance, if you have 20 years left on your first mortgage, consider a new 20-year loan or, at most, a 25-year loan. If you refinance for a 30-year term, you’ll pay tens of thousands of dollars in interest, making refinancing your home pointless.
It’s difficult to overestimate your income if you work outside of the home, but if you’re self-employed, it’s very easy to inflate your figures. If you own your own business, keep in mind that even if you make $5,000 a month, you’ll need to deduct expenses and taxes to come up with a true figure. Your lender will evaluate your income for lending purposes in this manner. While $5,000 a month may be enough to get you approved for a loan, your income after taxes and expenses may not be.
Refinancing your home doesn’t have to be difficult if you can avoid these common mistakes. Before you get yourself excited at the prospect of being able to lower your mortgage payment or take cash out of your home, be realistic about your chances for qualification. If you can avoid the mistakes above, the refinancing process will be a much easier one.
Dana Lions is a freelance writer in London. She guest writes for www.loanscalculator.co.uk where you can find resources for useful loan calculations.
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