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9 Refinance Mistakes and how to avoid them

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.

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.

Related Readings
Related Forum Discussions

rates are low about the same as our current mortgage 5% we also have a home equity loan that we used for an addition to our house. the interest rate which is variable, is great rate right now but ...

so what is the conventional wisdom on when to combine the two and refinance?
Posted on: 25th Dec, 2008 12:01 pm
Hi rasars!

Welcome to forums!

Yes, mortgage rates are going low. I have seen that a lot of people are refinancing their mortgage to take the advantage of the lower rates. You can try refinancing now. Check out the rates and terms with your current lender. You can also contact other lenders to find the rates and terms they are offering. This will help you in getting a fair idea about the market.

You can also seek a no-obligation free mortgage consultation from the lenders of this community. This will also help you in comparing the market rates.

Feel free to ask if you have further queries.

Sussane
Posted on: 25th Dec, 2008 09:40 pm
Thanks for the follow up. I have started talking with my current lender and with my previous mortgage broker (who said to go with my current lender as they could not match their rates.) This was great info. but I am after more wisdom.

For instance, one of the rules of refinancing is at least 1% rate decrease. This understandable for a primary but what about when you have a fixed primary and an adjustable home eq that you would like to fix and combine with your primary.

Right now rates are such that they equal my primary. So there is no benefit in fact a loss. But having the opportunity to fix my home eq and rolling it together with my primary is worth something. Just not sure what.

In the ideal world getting a 1% decrease would be great but 4% interest probably ain't going to happen. The other factor is that our primary is only $15k more than the home eq. (both are in $100k-$125).
Posted on: 26th Dec, 2008 07:29 pm
As the rates are quite low nowadays, it would be better if you can refinance your fixed mortgage and the home equity loan together. I think it will help you in the long run. The rates will not be low always. So its better to refinance both the loans into a fixed loan.
Posted on: 29th Dec, 2008 02:08 am
Hello. I have a 30 yr fixed at 6.125% and would like to reduce my monthly payment from $1400. we have owned the home for 1.5 yrs now and are located in Prattville, AL which is currently booming. I have seen are rates around 5.5%. should I use the 2% rule as a minimum for refinancing? The only benefit I am taking advantage of is paying bi-weekly. the home value was 235K when purchased but county assessment in beginning of 2008 valued it at 203K
Posted on: 06th Jan, 2009 11:02 am
Hi BB

I think refinancing is a good option for you provided if you are planning to live in the property for a long time. Remember that while you refinance the mortgage, you will have to pay the closing costs as well. You can speak to your current lender as well as the other lenders of your area and check out the rates and terms prevailing in the market. This will help you to decide whether you will be able to afford the payments or not. This community has a large number of lenders. You can speak to the lenders of this community and seek a no obligation free mortgage consultation. They will help you know what kind of rates you can expect to get.

Thanks.
Posted on: 07th Jan, 2009 01:18 am
Should I refinance a 30 yr loan down to 15 yrs. My current rate is 6%. I have 24 more yrs to. My 15 yr loan will be 4.75%?
Posted on: 02nd Feb, 2009 04:45 pm
Hey Brownis,

I feel it's a good idea to refinance the mortgage at a lower rate. Moreover refinancing will also lower the term of your mortgage as well.
Posted on: 13th Feb, 2009 10:28 pm
brownis, if the value of your home is adequate to cover your refinance, i am in agreement with adonis that you'll benefit by going ahead with that transaction.
Posted on: 16th Feb, 2009 07:11 am
I am looking to re-fi my home and consolidate a 2nd mortgage and a credit card balance. My current mortgage is 137,000 @ 6.245% w/ 24 yrs to go. My 2nd mortgage is 37,000 @ 8%, credit card is 13,000 @ 10% for a total of 185,000. I am also considering an escrow for taxes= 7,500 & insurance 600yr. The loan rate is 5.50 % for 30 years. We plan on living in our home for the rest of our lives, we are 50yrs old. Is it wise to roll every thing into a new loan? At the present time the listed above expenses is about 2500 a month, a new loan would be around 1800 with eveything included. The lender says we can re-coop closing cost in 14 months. HELP ME
Posted on: 24th Feb, 2009 01:57 pm
what kind of help are you looking for robert? it would seem you've thought this all out, and plan on moving forward. if that's the case, are you simply looking for validation?

if you can recoup your costs in a little more than a year, and you can be very, very conservative with your spending otherwise, it would seem a good move. just keep those credit cards in your wallet, or even better, in the freezer and don't make any big-ticket purchases if you can help it.
Posted on: 24th Feb, 2009 02:02 pm
When we bought our new (to us) home 4 years ago, we didn't sell our smaller home because we wanted to do some upgrades and repairs to sell. Then we decided to keep it as a rental until the market improved (ha!). We have a fixed 7.55% loan, with a $35K balance and a HELOC of $66K. I would make a wild guess that the property would appraise at about $125K to $150K, even today. Should I try to refinance the 7.55% first or try to get into a lower fixed for the full $101K?
Posted on: 23rd Mar, 2009 10:48 am
frankly, jo ann, refinancing investment properties is not a very popular item these days, but it's certainly possible. you'll find that it's going to be at a much higher price than what folk are paying for residential mortgages these days. if your value is in the upper range that you noted, then i'd think it would you'd be in good shape to refinance the whole package. right now, on a conventional, investment loan, you're looking at 75% as a maximum loan to value ratio to give you the best pricing, i believe. you can go to 80%, but (at least with rates i see at this moment), it's going to be costly at your closing.

you would want to try to determine actual value as best you can at this time. check with a realtor to see if you can get a value estimate, and that will allow you to make a proper decision on what to do next.
Posted on: 23rd Mar, 2009 10:59 am
hi , we have a 30 year mortgage with 19 years left. 8.5% int. We are 2 months behind. The bank is offering hardship modification . Should we ask for 20 year or 30 year at lower interest rate. Payments are 375.00 taxes are not escrowed. Should we just ask to move payments to end nothing else.
Posted on: 24th Mar, 2009 09:34 am
Hi sheryl,

Loan modification is quite a good option in your case. I guess a 20 year term will be better than a 30 year term. You should also remember that you will have to pay the taxes apart from paying the monthly dues. If you are planning to accept the loan modification offered by the lender, I would suggest you to request the lender to explain all the details relating to the plan to you. This will help you in taking a decision.

Thanks
Posted on: 24th Mar, 2009 09:32 pm
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