Current mortgage rates are on the lower end, but you can’t count on them to remain on the lower end forever. If you’re one of those homeowners who’s planning to refinance this year, you need to tread carefully because you might end up spending more than you bargained for. That said, avoid making these costly refinance mistakes:
Refinancing Without Sufficient Equity in Your Home
This would raise your overall mortgage costs. If your home equity value is lower than 20%, you would need to pay private mortgage insurance (PMI). This means that even if you manage to secure a low-interest rate in Utah, your PMI premiums would negate potential savings from a refinance.
Opting for a Lengthier Loan Term
Going for a longer loan term might reduce your monthly payments, but you might end up spending more over the loan term in interest. For instance, if your loan is worth $200,000 with a 4.5% interest rate, your monthly payments would be around $1,000. You would have spent upwards of $43,000 in interest, while saving up to $20,000 off your principal.
Overall, your interest would be around $164,000. If you decide to refinance the remainder, which is about $182,000 with a loan term of 30 years and an interest rate of 4%, you’d be paying more towards interest monthly. But, you save about $245 on your monthly payments. When you compare this to your original loan, you’ll only save $2,000 or less.
Doing Away with Closing Costs
Refinancing means taking out a new mortgage and replacing your original mortgage. This means that you’d need to pay closing costs again for finalizing the paperwork. On average, closing costs are around 2% to 5% of your mortgage’s value, such that you might need to pay $4,000 up to $10,000 for a loan worth $200,000. While you could opt out of paying closing costs, your lender would charge you a higher interest rate. This move could end up making your refinance more costly in the long haul.
Refinancing could save you a lot of money, but only if you go about it the right way and weigh all the pros and cons. It’s easy to just focus on securing the lowest interest rate, but you need to take into account other related costs. For best results, discuss your options with a reputable lender.