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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

something sounds weird, i agree. why would your existing mortgagee arrange a refinance with another company for you to begin with?
Posted on: 30th Dec, 2009 10:20 am
About how much does a person need to make in order to qualify for a refinance loan of $61,000? :lol: :wink:
Posted on: 03rd Feb, 2010 06:03 pm
Hi anonymous,

I would suggest you to contact your lender in this regard. He will judge your financial situation and will let you know whether or not you would qualify for a loan with your present income.

Thanks
Posted on: 03rd Feb, 2010 10:27 pm
anon, you don't need a ton of income to qualify for such a loan, but what we don't know and therefore cannot address is what your real estate taxes and homeowners insurance bills are. those are factors that need to get calculated in so you can learn if you are qualified. as noted, if you simply speak to a lender with all the particulars, you can surely get that information.
Posted on: 04th Feb, 2010 08:04 am
have had mortage one year at 5.5o percent fixed @ 30yrs should i tyr to refinance now to take advantage of the lower rates and can i even do this at all
Posted on: 24th Mar, 2010 07:57 am
As one year has passed since you've taken the mortgage, you would be able to refinance the loan. I hope you've equity in your property and plan to stay in the same house for quite some years. Unless you've such plans, it doesn't make much sense to refinance the loan. Also, it would be a good option to refinance the loan if you are getting an interest rate which is lower by at least 2% of what you have now.
Posted on: 25th Mar, 2010 03:28 am
if i refinance the loan on my residence, can this transaction hurt me if i want to pull out equity from my investment home later (which does not have a loan on it currently)?
Posted on: 12th Apr, 2010 04:47 pm
it could be that you were set up by your mortgage company with another refi company because they may not be licensed to originate mortgages in your state. or they could just be a servicer that doesn't originate at all, and just services preexisting mortgages for other entities. in this case, they would probably partner up with a company that does have access to your market, a subsidiary or something to handle origination and refinancing for them.
Posted on: 12th Apr, 2010 05:30 pm
yes looking...it is hard to give you any definitive answers because we don't know the circumstances surrounding each of your properties. as a general rule of thumb, however, the refinance of a primary dwelling wouldn't necesarily cause difficulty with the attempt to refinance an investment property
Posted on: 13th Apr, 2010 07:57 pm
I am thinking of refinancing, as you know the slow economy has affected us all. We were out of work a while back and got behind a little, we have kept our mortgage payment on time for almost 2 yrs. We do have a 2nd mortgage and i was wanting to put those together. We also did a modification on the 2nd loan. Do you think this will affect us as far as being able to get the loan due to credit?
Posted on: 21st May, 2010 06:41 am
Hi TG,

You will have to check out whether or not there is equity in your property. As you've applied for loan modification, I don't think there is equity in your property. In that case, the lender will not be ready to give you a mortgage.

Thanks
Posted on: 22nd May, 2010 12:06 am
We only have 8 years left on the loan. It is a 15 year fixed at 5.375. We owe 92K and the house is worth 500K. If we refinance for 8 years can we get a low enough rate to make it worthwhile? Can we even get an 8 year fixed loan? Our payment is 1100.
Posted on: 22nd May, 2010 06:07 pm
Hi K&K,

If you can afford the current payments, then it's better to continue with that. Moreover, I don't think the lenders would offer you a 8 years fixed loan. If you refinance the loan, you will have to go for a 15 year FRM. Thus, it's better to stick your present loan.

Take care.
Posted on: 24th May, 2010 02:16 am
There are no 8-year terms. Lenders will offer 10-, 15-, 20-, 25-, 30- and 40-year terms. It would be an unusual lender that would be looking at 8 years. By that, I mean you would be looking at a non-conventional (read: portfolio-only) product.
Posted on: 24th May, 2010 09:33 am
Since my credit score has dropped substantially low and my wife credit has not, when refinancing companies are asking to just base off my wife credit and just put me on the deed. What are the disadvantages of doing this?

Thanks
Posted on: 01st Jun, 2010 07:35 pm
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