Mortgage Refinancing: Look before You Leap
Anyone who spends any amount of time at all on the internet has probably seen a million and one ads and telling them that they can save thousands of dollars each and every year by refinancing their homes. Be careful since this may or may not be the case.
So many times we take what we are told as gospel truth, but in reality it is just a sales ploy to drum up business for lenders. In a recent Wall Street Journal article posted on Yahoo! Finance, it was made clear that many of those ads are posted by lead generating brokers who make it their business to match lenders with potential borrowers. As a result, it is not uncommon to find information on their websites that is either erroneous or incomplete.
For example, when you plug your data into their ‘calculators’ to get a rough estimate on what you would be saving by refinancing, there are several key factors which aren’t taken into consideration. First of all, there are origination fees, closing costs, title searches and a myriad of other oftentimes hidden upfront fees that can significantly reduce the amount of savings you would realize.
Then, of course, there is your credit history and credit score. Most consumers have absolutely no idea what the exact status is of their personal credit rating which is why those calculators often only ask you very broad questions. You won’t typically be asked for your exact score; rather, you will be asked if your credit is excellent, good, fair or poor. This tells them nothing and has no effect on the rate you will be expected to pay! Remember, even those with less than perfect credit can qualify for a mortgage loan but they often pay double (and sometimes more!) the interest than someone with a great credit score.
As a rule of thumb, refinancing your home can cost you anywhere from 3% of your unpaid balance to 6% or more. The point is, you will not be told that after paying these refinance charges you are saving little, if anything. In fact, there have been cases where refinancing actually cost borrowers rather than providing a savings. The ‘rule’ many people go by is called the 1% rule or the 2% rule. You will be told that if the interest rate you are being charged is at least 1% less than what you are currently paying you will save money. Beware! This is not always the case.
Again, the bottom line is your credit score and credit history which combined will be analyzed by a lender to predict your creditworthiness. Also, keep in mind that every time a lender runs your credit history it will automatically result in losing a few points on your credit score. It would be far wiser to get a free annual credit report from each of the three credit bureaus in order to know exactly where you stand. Actually, you can go one step further as there are credit monitoring companies that will also keep you informed of any changes as they occur. This helps to prevent identity theft as well as giving you the heads-up that there may be an error which has been entered to your history.
Nevertheless, there also may be times when refinancing your mortgage could indeed save you a bit of money each year. The point is, talk to a disinterested third party such as a consumer advocacy group prior to finalizing a new mortgage. If you will realize a savings even after all those hidden refinancing charges, then this may actually be a great plan. Just make sure to look before you leap.