When you've decided on a refinance in order to switch over to a better interest rate/loan, you should be aware of the mistakes most people make while refinancing and how to avoid them. A little know-how about the common refinance mistakes will prevent you from taking a wrong step during the process. Here are the top 9 mistakes you should avoid when you refinance.
1. Refinancing without shopping around
Many believe it's easier to get a refinance from their current lender. But your current lender may not offer the best option in terms of rates, fees, and other terms and conditions. So, it's better to shop around and compare the offers until you find the right loan for you.
Even if you do decide to refinance with your current lender, you'll need to re-qualify for the new loan. This means your current financial situation will have to be verified by the lender.
2. Unaware of the Break-Even period
When you are trying to refinance, you'll have to pay closing costs that can be offset by your savings due to the lower interest rate. The time when your savings fully offset the costs of the new loan is the break-even period.
You need to calculate the break-even period, so that you can occupy the property until then and recoup your costs. This is helpful when you refinance with a similar loan in order to take advantage of a lower interest rate and monthly payments.
3. Not receive a Good Faith Estimate
Most lenders are likely to provide you with a Good Faith Estimate of closing costs within 3 business days of receiving your loan application. This helps you to trace any hidden costs that you can avoid. So if the lender doesn't provide you with an estimate, try contacting the lender. If the lender refuses to provide you with an estimate, contact another lender who will.
4. Considering Assessed Value of property
Do not depend upon the county tax assessor's assessed value of your property. The loan amount isn't based on the assessed value, but on the appraised value of your property determined by a real estate agent using either the Sales Comparison Approach or the Cost Approach.
5. Paying for an appraisal even if home value is low
It's better not to agree to pay for a formal appraisal when you are aware your appraised home value may be low enough to qualify.
If you think the appraised value of your home is low enough to get a good refinance loan, then you should ask your current lender to determine your home value using the automated valuation model (AVM). This approach takes into account the value of similar homes in the neighborhood.
The appraiser gives you a range of possible home values, which will allow you to determine whether you can afford the home with the financing that is available. You can even check out the home affordability calculator to know how much mortgage you will be able to afford: http://www.mortgagefit.com/calculators/howmuch-afford.html .
6. Signing loan docs without proper review
Check the loan docs before signing on them. Read the terms and conditions thoroughly before you sign them. If possible, ask the lender to allow you to read the papers in advance because you will not get enough time to go through all the docs at closing.
7. Not providing relevant docs in time
You can prevent unnecessary delays in closing if you submit the required documents to your lender on time. Otherwise, if closing is delayed, and mortgage rates go up then you may be stuck with the higher rate.
8. Getting a verbal Rate lock
It is best to get the rate lock in writing from your lender. This written statement includes your interest rate, length of rate lock, and other details of the loan program.
9. Taking cash from a HELOC (Home Equity Line of Credit)
Lenders often require that homeowners wait at least 6 months after taking money out of a home equity line of credit, before refinancing.
Moreover, if you withdraw money from your HELOC for anything except home repairs and then refinance, lenders will consider the first transaction as a "cash-out". This is because you've already accessed your line of credit. So, it's a good move not to pull out equity prior to a refinance.
Refinancing mistakes can cost you a lot of time and money. So, it's better to avoid them and stay away from mortgage problems that could land you in foreclosure.
It is really hard to time the market. You never know when rates will go up or down. I do know that right now the rates are low on a 30 year fixed. If you think you will be in the home for more than 8 years I would suggest taking a look at refinancing now since the rate is about 5.50% to 5.75% on a 30 year fixed, depending on credit score and equity. This will pay off in the long run. I watch rates daily and have been for years. My advice is that there is more room for them to go up from here, than down. If it were me, and I was looking to stay in the home long term, then I would refinance when the fixed rates were low, as they are now. This is why I do suggest looking at refinancing now rather than later. _________________ Lisa Scherzer
Expert Mortgage Broker
I don't think you should do it right now. After all, 6.5% is good enough in this market scenario and it's 8 long years to go before the rate would adjust. _________________ Procrastination is the enemy of your financial success
If you plan on being in the home long term then there can certainly be a benefit to refinancing now while rates are low. A one percent reduction in rate reduces payments and interest. On a 150K loan, that is a savings of 1500 per year and over 8 years that is 12,000. Now I dont know what the loan amount is but if it is even higher then it's just more of a savings. Why should they overpay for the next 8 years? _________________ Lisa Scherzer
Expert Mortgage Broker
Is your daughter wants to quitclaim her property to you? If so then you should refinance mortgage. Now if you have good credit then you can get approved for the mortgage loan with lower rates and better terms. By the way, how good is your credit score? Can you afford the mortgage payments? Why does your daughter want to quitclaim to you? _________________ Good is the Enemy of Great.
Well that actually depends. Most lenders do require an interior inspection but some do not. Some even allow for an appraisal waiver meaning there is no appraisal required if your income, credit, and equity position is strong and the home is not located in a remote area. _________________ Lisa Scherzer
Expert Mortgage Broker
I have a 30 year mortgage with a 6% fixed for the duration. I have seen rates as low as 4.25% with the current economic crisis. We have owned the home for 3 years and have made principal payments in excess of $3000 every year in addition to our normally scheduled payments. I am thinking that refinancing now and saving the extra 1.75% would be worth it but what if the rates go even lower? Would it be worth it to refinance at this time?
Keeping in mind the current economic crisis, rates are really low. You can refinance your current mortgage into a fixed rate one during this time. This will also help you in saving some money. It my opinion it is a good option for you.
Well, you never know whether the rates will fall further or not. I don't think you should wait for further lowering of the rates. In my opinion if you get good offer now, you should go for it.
I have 8.5 more years to pay off my 15 year fixed rate home loan. I owe about $72,000 on it at a rate of 6.676%. My payment before tax and insurance is $910.03 per month. Would I benefit from a refinance? Do they refinance homes with a 8 or 9 year fixed mrtgage?
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