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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

what is the current interest rate as of today for 10 year mortgage
Posted on: 29th Mar, 2009 09:59 am
The current interest rate for 10 year mortgage is around 4.50%-4.55%.
Posted on: 30th Mar, 2009 12:09 am
"current" in this case is as of the other day; rates are subject to change at all times, and at a minimum, daily. beware of any quotes you get blindly - they're only as good as the moment.

now, that's not to say that those rates above aren't reasonable. i'd expect rates to stay in that vicinity for a bit.
Posted on: 30th Mar, 2009 07:12 am
i got a 15 year fixed-rate mortgage loan with 6% interest. my original loan is $117,000 and monthly payment is $988 currently. now my current balance is $53,000. please tell me whether or not needing to refinance??? thanks in advance.
Posted on: 14th Apr, 2009 07:22 pm
Hi A. Truong!

Welcome to forums!

You can refinance the property as the rates are quite low these days. However, it will also depend whether you are planning to stay in the property for a longer period of time. If you plan to stay in the property for more than 2 years, then it would be a good idea to refinance. If you do not wish to stay in the property then it is not a good option to refinance as you would be required to pay a large sum of money in closing costs.

Feel free to ask if you have further queries.

Sussane
Posted on: 14th Apr, 2009 08:58 pm
"needing" to refinance is a personal decision. paying 6% for a 15-year loan right now is higher than what you can obtain should you seek a refinance.

as sussane has pointed, out you've got to analyze the cost efficiency of refinance (savings vs. cost). if it makes sense to you to refinance, then go ahead and do it.
Posted on: 15th Apr, 2009 06:32 am
we are trying to refinance our mortgage ($257,000), we also have a second mortgage (49,000). our broker is telling use that since our house is appraised at 350,000, he does not think the new appraisal will come back that high and he is suggesting that we wait about 45 day? i don't understand this, can you please explain this to me... is it possible not to include the 2nd loan and just get the 1st loan refinanced? you help is greatly appreciated.
Posted on: 16th Apr, 2009 10:50 am
elisa, i dont get the 45 days at all, but if your second mortgage was obtained after your first mortgage, you'll be limited to 85% of the current property value in your refinance request. so, if your home is worth $350K, the maximum loan would be $297500, and that would leave you short of paying off the two loans. that might still work, as you may be able to resubordinate the remaining balance. your scenario of leaving the second alone might work also.

there has to be some sort of explanation coming from him to say why wait 45 days, why an appraised value of $350000 wouldnt be an appraised value of $350000 - a real puzzler.

he needs to be more forthcoming with answers; our answers will be less than satisfactory because he presumably has facts that we don't have.
Posted on: 16th Apr, 2009 11:16 am
Is it true that as of April 1, 2009 the FHA instituted a new law in which the amount to be refianced can not exceed 85%
Posted on: 16th Apr, 2009 01:37 pm
Well...I haven't heard anything of this sort. Where did you get the news from?
Posted on: 16th Apr, 2009 11:17 pm
85% is the maximum loan to value ratio for a cash out refinance only. purchases are still at 96.5% as are rate/term refinances.
Posted on: 17th Apr, 2009 05:59 am
my current loan balance is 113000 on a 30year fixed rate at 6.5% lived in home for 2 and a half years home valued at 138000 is it worth to refinance
Posted on: 27th Apr, 2009 12:25 am
pp, it is worth looking at refinancing. you can probably get a rate up to 2% less than what you're paying now, and perhaps a bit lower. calculate the savings in rate and how much it's costing to get to that rate to determine if it's worth it. if you plan to be in the home for several more years, it is likely worth your effort.
Posted on: 27th Apr, 2009 01:59 pm
I bought my house 14 months ago at interest rate 6.5 and second lien at 9.25. Now I am doing refinance, new appraisal report home value shows $15000 less than purchased price. so Its missing 80 or 85% equity line.
I locked at 5.25% to refinance for first lien, in this case is it worth doing refinance?
To meet 85% equity line, I have to make a down payment around $20,000.
My home zip code is 75056
Please guide me.

Thanks
Posted on: 05th Jun, 2009 09:17 am
Your query has been replied in the given link:
http://www.mortgagefit.com/refinance/make-downpayment.html

Please take a look. Hope it helps you.
Posted on: 05th Jun, 2009 11:12 pm
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