Top Ten Mistakes to Avoid when Refinancing

1. Refinancing with your current mortgage company without shopping around. It is a misconception that refinancing with your current mortgage company is easier because of the history you have with them. In most cases, your current mortgage company will require the same documentations as any other mortgage company. The reason for this is that most loans are sold on the secondary market and each loan file needs an individual approval. Even though you have a great payment history with your company, they will still need to verify assets, liabilities, employment, etc. all over again. Second, your existing mortgage company might not have the best rates or best program available to you.

2. Not calculating a break-even analysis. When refinancing you want to calculate how much you will save every month and then determine when the total costs of the transaction will be recouped. Then simply divide the total cost by the monthly savings to find the number of months you will have to keep the loan to break even. Example: if your new loan program saves you $100/ month, and the transaction costs you $2500, then you break even in 2500/100 = 25 months. In this example, this new loan would be beneficial if you planned on staying in your home for at least 25 months.

(This is a simplified calculation for break-even analyst, if you are changing from an adjustable rate mortgage to a fixed mortgage, or lowering your loan term from 30 to 15 years, the calculation is more complex, and it is advisable to ask your loan officer.)

3. Getting a second mortgage without trying to refinance your first. Unless your first mortgage has certain benefits, it is always advisable to refinance your first before getting a second mortgage. Carrying a second mortgage will increase your monthly mortgage payment and also bear a high interest rate. Also most find it convenient to have one mortgage payment rather than two.

4. Not receiving a rate lock in writing. When your mortgage company verbally tells you that your rate has been locked in for a certain period, always get a written document with the interest rate, loan term, and any other details about the locked program. In most cases, without a locked rate, your interest rate and program details will change at closing.

5. Not receiving a good faith estimate of closing costs. Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE. Keep in mind that it is nearly impossible to give exact figures before closing because of the differences in each county and third party fees, but a GFE will give you a good idea of what kind of costs are involved.

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