July 1st, 2020 10:16 AM by Jackie A. Graves
Mortgage rates keep hitting new all-time lows, and homeowners have been rushing to refinance and shave down their monthly payments — sometimes by hundreds of dollars.
As 30-year mortgage rates head toward 3% and lower, you're a good candidate to refinance and save if your current mortgage rate is in the neighborhood of 4%. That's pretty common, because rates were averaging around 4.2% in the spring of last year.
Think you're ripe for a refi? Careful there, because mortgages are complicated and it's easy to make a misstep.
Refinancing errors can be costly. Here are six of the most common ones you'll want to avoid on your way to landing a new loan.
1. Not comparison shopping to find the best deal
You probably wouldn't buy a new car without shopping around and comparing prices. Same goes for a plane ticket.
So why would anyone grab the first mortgage they see? Yet studies have found that more than 30% of borrowers never comparison shop for mortgages, says the U.S. Consumer Financial Protection Bureau.
Recent research from LendingTree found that homeowners who refinance without shopping around pay an average of $163 extra per month or $1,953 more per year.
So, compare refinance offers from three lenders, maybe more. Be sure to ask for loan estimates, says Viral Shah, co-founder of the online mortgage lender Better.com.
"The only way to validate an offering and compare two options apples-to-apples when you’re rate shopping is to get an official loan estimate," Shah says. "A loan estimate is a standardized document detailing all the costs associated with your mortgage."
2. Looking for a zero-interest mortgage
Have you heard that the Federal Reserve has cut interest rates to something close to zero? Yeah, that happened — but don't assume it means 0% mortgages are available.
Because they're not. Thirty-year mortgage rates have been at the lowest levels in history and are incredibly attractive, but don't waste your time hunting for a loan that's interest-free.
"A Fed rate cut to 0% does not mean that mortgage rates do the same," says Kimberly Lanham, senior vice president of Digital Risk, a mortgage consulting firm.
There isn't a direct connection between the Fed's benchmark rate (called the federal funds rate) and mortgage rates. Instead, the rates on home loans are closely tied to the yield, or interest, on 10-year Treasury notes.
Yields have been dropping and bond prices have been rising as worries about the new surge in coronavirus cases has led investors to pull money out of stocks and put it into bonds as a safer bet.
3. Taking too long to make your decision
Financial markets have been volatile, and so have mortgage rates. So don't dawdle. Try to move quickly to lock a rate if you see one that would work well for you.
"The mortgage market is evolving quickly. Rate changes and program guideline changes are common. What’s available today may not be available tomorrow," warns Chris Ryan, mortgage loan officer with Citizens One Home Loans in the Washington, D.C., area.
If you obsess about trying to time things ju-u-u-u-u-u-u-u-ust right and land the perfect mortgage rate, you're likely to miss out on the best deal available.
"The best rule of thumb is that if the numbers make sense, seize the opportunity," says Shah, of Better.com. "The cost of waiting to see if rates go lower can backfire instantly, not making it worth the risk."
4. Not having your paperwork organized
You could lose out on a refinance opportunity if you fail to have your "docs" in a row.
"Homeowners need to understand the mortgage process and what is expected of them," says Lanham, of Digital Risk. "Having all documentation regarding income, assets and taxes makes the process much smoother."
It's important to get your taxes done on time, if not sooner, Shah says.
"Your tax returns are used to determine exactly how much you can afford to spend on your mortgage every month. Because a mortgage commits you to years of payments, we want to make sure your loan is affordable both now and later in life," he says.
According to Shah, lenders will want to see: one to two years' worth of personal tax returns; business tax returns going back up to two years, if you own more than 25% of a business; and one to two years' worth of W-2s or 1099s.
5. Forgetting about mortgage closing costs
Refinances aren't free.
"Refinancing includes closing costs similar to the ones you paid when you got your original mortgage," says Shah. You must pay fees including a loan application fee, a mortgage origination fee, a fee for an appraisal, a settlement fee, and others.
These mortgage closing costs typically will hit you for about 2% to 5% of your loan amount, or an average $5,749, according to the latest estimate from real estate data firm ClosingCorp.
If you can't or don't want to pay your closing costs upfront, you can have your lender cover some of the expense — but in exchange, you'll be given a slightly higher mortgage rate.
"Another option is to 'roll-in' your closing costs by adding them to your mortgage balance," Shah says. "Both choices can drastically reduce your closing costs and make a 'no-cost' refinance possible."
6. Not being patient
It's true that you need to move swiftly if you want to refinance your mortgage at one of today's dirt-cheap rates — but then, be prepared to chill. The coronavirus pandemic has slowed down mortgage processing.
"Lenders are handling larger volume levels and patience is necessary," says Ryan, of Citizens One.
Borrowers may encounter delays in mortgage approvals and closings because of COVID-19, and title searches can take extra time, particularly in states that are now backtracking on their reopenings.
"Many town halls and county clerk’s offices are closed or not set up online to pull these items, and lenders will not close without some of these searches," says Richard Pisnoy, a principal with Silver Fin Capital Group, a mortgage broker in Great Neck, New York.
But lenders want to show that they appreciate your patience. "Most are offering longer rate lock periods at the same price as shorter lock periods, to compensate for the backlog," Pisnoy says
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