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.
6. Signing documents without reading them. Whenever possible, review in advance the documents you’ll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you’ll sign are standard forms and are available for review.) It’s unlikely that you’ll have sufficient time to read all the documents during the closing appointment.
7. Not working with the lender in providing documents in a timely manner. This is one of the most important factors in getting the best loan program available. When your mortgage company asks you for additional documents, provide them immediately, because these documents are needed for the program you selected. There are ways around not showing documents, but it will increase your costs and rate. Whenever possible, get everything your mortgage company asks for. Delays in providing documents can result in costly delays.
8. Paying for an appraisal when you think your home value is uncertain or low. You should always ask your mortgage company to prepare a desk review before an appraisal is completed. A desk review will give you a range of what the estimated home property value is. You do not want to pay money for a full appraisal when it is doubtful that you will get the value needed to qualify for a loan.
9. Not asking about points and origination fees. Points and/or origination fees are used to buy down the interest rate. You must look at both the points and rate, not just the rate. Origination fees are something you must watch out for. An origination fee is basically the same fee as points, some lenders separate the two costs in order to make the fees seem smaller, but overall the two is costs that are incurred for the program.
10. Not considering the overall situation for yourself. When refinancing there are many routes and programs to choose from. You want to pick a program that fits your situation and your needs. Each borrower will have a different situation and a different solution.