10 Common Mistakes People Make When Refinancing

Common Mistake #1 - Taking Cash out of your Home Equity Line before Refinancing

Most lenders have what is called a seasoning requirement for any "cash out" on a line of credit. Seasoning is simply a set period of time (usually 6 months) that must elapse once you take "equity" from a home prior to them funding a new loan. Lenders often view taking cash out and then refinancing as red-flag for people that are not responsible with their credit use.. Some lenders even charge higher interest rates if you want to take out a new loan and "cash-out" on any equity.

Common Mistake #2 - Opening a second mortgage before refinancing your first mortgage

Nearly all lenders take your total loan-to-value into consideration even if you are only refinancing your first. This is because they will either require you to get a mortgage to pay-off both loans or will require that your existing second mortgage be subordinated. If you're LTV of the 2nd loan and the refinance 1st is over the appraised value, you won't get refinanced.

Common Mistake #3 - Failing to perform a Break-Even analysis on the refinance

The whole purpose of a refinance is to save money on the monthly payment or to pay off your house sooner. Don't be a fool and not consider the costs of the refinance as it may take you more time to recover your transaction costs that the amount that is saved monthly.. It is easy to calculate as all you need to do is divide the total transaction costs by the monthly savings amount. For example, if the costs of refinancing total $5000, and you save $50 per month, your break-even point is 5000/100 = 50 months. In this case, you should only refinance if you plan to stay with the new financing for at least 50 months. The only time this wont matter as much is when you are switching from an adjustable rate or shortening the loan term by switching a 30-year mortgage to a 15-year one.

Common Mistake #4 - Having your house appraised when you think (or know) the appraised value might be too low.

If you are not sure, then ask a mortgage broker to do a quick market based analysis appraisal, or an automated one that doesn't require an outlay of cash.. You can always check Zillow.com or ask a realtor to give you an opinon based on comparable sales. This will help you decide if you want to spend $300-$500 on a formal appraisal.

Common Mistake #5 - Using the County Assessors Value when trying to figure out the value of your property

No individual or company will use the county tax assessor's value determine if they'll give you a loan. The value the tax assessor assigns is not even remotely relevant to the actual value of your home. Nearly every business will use the comparable sales approach to decide if they will proceed with starting the loan origination process. Many websites give you the ability to get a "guesstime" of your homes value and the best one to use is zillow.com. HOWEVER, appraisers use comparable sales and then take other items into consideration like location, market, and condition.

Common Mistake #6 - Refinancing with your current lender

While using your current lender to perform a refinance is acceptable, you may not always get the best deal regardless of how good your history with them is.. he key to the best rates and terms is to shop lenders and compare the offers. Many times your current lenders offer a streamlined refinance to keep the paperwork hassle to a minimum, but that usually doesn't yield the best deal. The partners of edebtsolutions.org will give you the best rates and terms available for your personal financial situation.

Common Mistake #7 - Failing to ask for a Good Faith Estimate (GFE) of estimated closing costs

Lenders are required by law to provide you with a GFW within 3 business days of receiving your loan application. Many will happly give you one in advance of the application.. When shopping for a loan, always compare GFE's and verify that all fees are being disclosed upfront. Many unscrupulous lenders will account for fee's in the interest rate by charging a higher one or increasing the loan value and rolling them in there. If you have a GFE with a lot of the fee's marked with a zero, this is a BIG warning sign that something is amiss and that you may not be getting the best deal. Remember that on "no-cost" refinances there are no fees paid by you on a GFE, the lenders usually just increase the rate or terms to cover the costs.

Common Mistake #8 - Failing to get the interest rate lock in writing

Short story, if you don't have it in writing, then your interest rate can and most likely will change. While loan officers can quote rates, until it is locked in writing it isn't guaranteed because rates can change significantly in a matter of hours. Once you have confirmed that your rate is locked, ask for it in writing and make sure you understand when the Rate Lock Commitment (RLC) expires.

Common Mistake #9 - Not reading mortgage documents before signing them

Always read the documents before signing.. As soon as the closing agent is identified and has your loan package, ask for an advanced copy of the paperwork. That way you can review in advance, not at the closing table where you will feel rushed, and then you can ask for explanations on things you don't understand. This is what got a lot of the people who are in foreclosure now in trouble. Make sure to have a copy of the GFE at closing along with your rate lock and any ARM details. This way you can make sure that you are getting what was promised. Remember, mistakes get made, just don't be the one that pays for it. Lenders and originators will make things right and if they won't then don't close the loan.

Common Mistake #10 - Not being timely with delivery of documentation to your lender

Most people complain about how long a refinance takes and it should be about 30 days or less. What impacts a refinance timeline is how quickly you get the lender what is needed to get the transaction done. Quick turnaround on documentation requests will save you huge amounts of time. Most lenders can turn a refinance in about two weeks.If you delay getting doc's back, you can possibly hurt yourself as remember, you interest rate lock has and expiration date and if your loan hasn't funded by that date, you could possibly get stuck with a higher rate or have to cancel your refinance all together.

Mortgage and Credit Debt Services
Q What should I do if I am deep in debt?
A Whether it is caused by illness, the loss of your job, or simply just over-spending, a financial crisis of this sort can seem overwhelming, but it often can be overcome. Don't let your financial situation go from bad to worse.

Realistic budgeting, credit counseling from a good organization, debt consolidation, or bankruptcy, are some of your options. Knowing which one will work best for you depends on how high your debt is, if you can discipline yourself, and your prospects for the future.