Remember when shag carpet was “cool?”
Homeownership mistakes like that happen. And while some are just a trivial matter of design, other homeownership decisions can have more serious implications – like refinancing your home.
Maybe you’ve already answered yes to the “Should I refinance my home?” question – and that's great news! But there are some things you’re going to need to know before you start the process, or you’ll risk pulling a shag-carpet-level mistake.
Here are the 5 biggest refinancing blunders you’ll want to avoid.
1. Not locking in your rate
Homeowners could be missing out big time by not refinancing their home loan. Rates are still near historic lows, making now a potentially great time for many homeowners to refinance. But one big refinancing mistake is taking the gamble that rates will fall even lower before you can lock in an already low rate.
It makes figuring out when to refinance more challenging. But know that rates aren’t guaranteed to stay this low forever!
2. Not doing your homework
You wouldn’t build a piece of furniture without reading the instructions first, right? (OK, you’d probably try, but not without a few cries of frustration.)
Refinancing your home is an awesome but important decision to make and it requires a thorough understanding of the process, including where you stand financially and a few other factors.
What specifically should you know?
- Your credit score. Your score is a key factor that helps determine the rate you receive. A better credit score, a better chance to save more on interest with your refi.
- Your home’s value. Improving your home’s value can help increase your home’s equity. Research potential comps in your neighborhood to get an idea of how much your home is worth, and consider making renovations like these for a chance to improve its value.
- Your refinancing options. There’s no such thing as a one-size-fits-all refinance! There are several home loan choices available to match your unique needs, you can discuss those options with a Loan Officer and check out our guide to compare refinance loan options.
- Your potential interest-payment savings. Using a refinance calculator can give you a good estimate of what to expect.
3. Forgetting key ratios
The most important ratios involved in a refi are Loan-to-Value (LTV) and Debt-to-Income (DTI).
LTV is the proportion of your remaining mortgage to your home’s value. Say your home is worth $200K and your mortgage stands at $100K. This would make your LTV 50%.
DTI is how much debt you have to your name versus your income. This number is factored into the rate you’ll receive, so you’ll want to get it as low as possible.
4. Adding large debts to your credit before closing
Remember DTI? Here’s where it can make a surprising impact on your refi.
One common refinancing mistake is making large credit decisions before your refi loan is complete. For example, using credit to buy a set of appliances could affect your credit score, by raising your DTI, which could ultimately affect the interest rate you are offered (and if the change is drastic enough, your approval, too).
5. Focusing only on interest rates
Sure, a lower rate generally means a lower payment. But that doesn’t tell the whole story behind refinancing.
Points, fees, and loan terms are all factors that will contribute to how much you need to pay out of pocket. But choosing a trustworthy lender who can offer you the advice, tools, and resources you need to succeed is equally as important.
So what do we say to making refinancing mistakes? Not today. Equipped with a trusted home loan partner, you’ll be able to refi with confidence. And when you do, don’t forget about the enormous benefits that come with refinancing your home. See how a cash-out refi may be able to help with some major expenses.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.