KEY POINTS
- Many individuals tend to accept the initial refinancing rate they are given, despite the fact that exploring other options could lead to savings.
- Attempting to predict the perfect moment to refinance is misguided if the current numbers already work in your favor.
- Refinancing may not be the best option for everyone, but it is becoming increasingly appealing to numerous home buyers.
Mortgage rates have recently dropped significantly and are now well below their highest point in 2023. This situation is now making refinancing an attractive option for many individuals who purchased homes in the last few years.
Although refinancing might be a good option for you, there are several considerations to be aware of before you begin the application process. Here are two frequent errors people tend to make when refinancing their mortgages, and why it’s crucial for you to steer clear of them.
1. Avoid agreeing to the initial loan proposal you receive.
A frequent error I often notice in mortgage applications, whether for buying a property or refinancing, is when people apply with one home loan provider and just agreeing to any interest rate and loan conditions that are presented. You should avoid doing this in any situation.
It’s crucial to grasp that various lenders employ distinct approaches to assess and approve loans. It’s often the case that a homebuyer will submit mortgage applications to three or four different lenders and receive slightly varied interest rates from each one.
Although I mention “slightly different,” you might be amazed at the significant impact of securing the absolute best rate.
Imagine this scenario: You have a mortgage of $400,000 and you’re planning to refinance One lender presents you with an interest rate of 6.375%, whereas another proposes a rate of 6.25% with a comparable origination fee. Although these interest rates may seem nearly identical, opting for the lower rate could save you $11,520 in interest over the course of a 30-year loan compared to the higher rate.
Completing mortgage applications for multiple lenders could take you a few hours, but it would be a worthwhile investment of your time. Additionally, it’s important to remember that applying to various lenders won’t negatively affect your credit score. The FICO scoring system includes a specific rule that promotes comparing rates.
If all your mortgage applications are made within a typical shopping period, usually defined as two weeks in most FICO formula versions, they will be treated as one credit inquiry when calculating your score.
2. If refinancing is financially beneficial, don’t delay in doing it.
As previously stated, the majority of specialists anticipate that interest rates will decrease significantly in the coming years. However, it’s impossible to predict exactly when this will happen or the extent of the decline. Overall, attempting to predict changes in interest rates is an unwinnable challenge At the start of 2022, the majority of experts anticipated that the 30-year mortgage rate would remain under 4% for the foreseeable future.
Suppose you purchased a house last year with a 30-year mortgage at a 7.5% interest rate. Now, you have the opportunity to secure a 6.5% rate, and despite the origination fee, the calculations are favorable. However, the Mortgage Bankers Association anticipates that the 30-year rate will decrease further to 6% by the end of 2025.
Is it wise to delay refinancing? Not really. There’s no assurance that you’ll secure a 6% interest rate next year, and until then, you’ll keep paying at your present (elevated) rate.
There is no restriction on the number of times you can refinance. Mortgages allow for continuous renegotiation in one direction. I know people who refinanced their mortgages twice, or even three times, when interest rates dropped in 2020 and 2021.
Should you consider refinancing?
Due to anticipated interest rate reductions expected to begin later this year, mortgage rates have recently dropped to their lowest point in 15 months. The current average rate for a 30-year mortgage is 6.49%, significantly lower than the 2023 high of almost 8%.
In brief, if you intend to stay in the house for a period where the monthly savings from refinancing outweigh the refinancing costs, it might be worth considering the option to refinance.
