Posted on: 21st Sep, 2005 09:24 pm
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.
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.
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 .
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.
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.
Related Readings
Related Forum Discussions
- When to refinance a mortgage along with Heloc
- Should I need a title insurance at the time of refinance?
- Is it possible to refinance after bankruptcy?
- Should I refinance my house to consolidate debts?
- Can I refinance my home which is filed for Federal tax lien?
- Should I refinance my house or pay more towards the principal?
- Is the cash from refinance taxable?
- How many times can you refinance a mortgage?
- Should I refinance my house to add my wife to mortgage?
- Is it possible to combine ARMs and then refinance?
- Home Affordable Refinance - What is it all about?
- What is conventional streamline refinance?
If I have fallen behind due to a sudden increase in number of dependents and a salary reduction, can I still refinance and get additional funds so I can reduce debt?
Hi salamander,
As you are past due on your debts, you won't be able to refinance your loan. However, you can always contact the lender for a loan modification. If the lender accepts this offer, you would get a lower interest rate to pay off the loan but the term of loan payment would get increased.
Thanks
As you are past due on your debts, you won't be able to refinance your loan. However, you can always contact the lender for a loan modification. If the lender accepts this offer, you would get a lower interest rate to pay off the loan but the term of loan payment would get increased.
Thanks
have good credit but i bought it for my daughter a nd she skipped out on the payments.we picked them up because we co sign.the interest rate is 12% we have had this nice trailer for 6 years still owe .is it possible to refinance the trailer at a lower rate.
Hi Bill,
If you're current on your mortgage payments, then you can refinance the loan. This will help you in getting a better interest rate. I hope you have a steady income and a good credit score. In order to get a mortgage, you should have a credit score of around 740.
If you're current on your mortgage payments, then you can refinance the loan. This will help you in getting a better interest rate. I hope you have a steady income and a good credit score. In order to get a mortgage, you should have a credit score of around 740.
adonis, there are plenty of mortgages available out there for folk with credit scores below 740. yes, with a conventional loan, a person is best served with an excellent score, but fha loans (and others) provide more than adequate financing for those with scores far lower than that.
Hi, I refinanced in 2003 from a 30yr on my home purchased in 1999 for $75K at 7.5%, DOWN to 15yr at 5.75%. My payments went up $16.00 mo. and I cut 15yrs off my loan. I'm now wondering if I should refinance again. I owe about $40K and have 6 yrs (approx.) left on my loan (because I've always paid $100 extra toward principal). I went via my original lender and only paid a fee of $380! Can/should I refinance again, for maybe a 5 year term??? The current value of my home is about $174K. Thanks! This site has been SO helpful!
darlene, with only 6 years remaining based on your payment habits, i wouldn't think it's worth the trouble to investigate a refinance. this is before i even begin to tell you that there are no lenders offering 5 year terms.
it just seems like a waste of time to me...and yes, i know i am potentially eliminating a payday for somebody, but i don't really see your benefit coming here.
it just seems like a waste of time to me...and yes, i know i am potentially eliminating a payday for somebody, but i don't really see your benefit coming here.
It is a good idea to refinance the loan but you've to pay the closing costs. If you're planning to stay in the property for a longer period of time then it would a better to refinance the loan. Moreover, you should check out the interest rates that you would while you refinance the loan. If the interest rates are affordable for you, then you can go ahead with the deal.
however, bear in mind that you won't find any 5-year terms. if you fully intend to try to do that, find a lender that will give you a home equity loan at a very low rate. i think it's folly to try to refinance when you've got 6 years left, for the sole purpose of a minimal interest rate reduction. do the math first.
I think I'll ride out my time. Id'd actually planned to sell my home and all it's contents last year, with the goal of packing up and moving to San Diego!! BUT...life happens...had a baby in February (at 44yo) and my only baby before her, a 19 year old son, was recently diagnosed with advanced colon cancer (a week before he was to leave for college in San Franciso). So, I'm up in the air as to if I should stay or go once he finishes chemo,...but your resonsed on refinancing have been helpful!
darlene, if you can have a healthy new baby at 44, then there's also hope that your son will be able to be healed from his cancer. we'll agree on that and pray.
George, wonderfully stated. Please continue to pray for my son, Kalief. He WILL beat this!
All my best wishes are with you, Darlene. I pray to the Almighty that your son gets well soon.
just applied for refinance. we were told we qualified for 5% interest (from 8.05%). asking for 108,000 (payoff 102,000, cashing out 2,000, and including closing costs). appraisal came in at 102,000. requiring us to pay 6500 at closing! all comparables were 2 at 119,000 and 1 at 111,000. neighbors property refinanced 2 years ago appraised at 115,000 and we share the same driveway, roughly the same house size. what are we gonna do? :?
My mortgage co has set us up with another mortgage co to refiance at a lower rate and with a principle reduction, we have never been late or missed any payments, so I dont know why they are even doing this, also my concern as the wife is I have always been on the loans before, but I got laid off back in March of 09, so I will not be on the lending part, we have asked that I be put on the deed or the title, they said they could. Will this cover me down the road if anything should happen, this will be the first time in 30 years that I can't be on the lending part, just want to make sure I am not putting myself somewhere that is going to cause problems maybe down the road. This is all being done with no closing cost. Please advise