Top 10 Mistakes When Refinancing

1.     Refinancing with your existing lender without shopping around. Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender  will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.

2.     Not doing a break-even analysis.  Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you’d refinance if you planned to stay in your home for at least 40 months.

Note:  This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.

3.     Not getting a written good-faith estimate of closing costs. Enough Said.

4.     Paying for an appraisal when you think your home value may be too low. Have the appraisal company prepare a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company’s appraiser may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.

5.     Using the county tax-assessor’s value as the market value of your home. Mortgage companies do not use the county tax-assessor’s value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.

6.     Signing your loan documents without reviewing them. Don’t sign anything without reading it first.

7.     Not providing documents to your mortgage company in a timely manner.  When your mortgage company asks you for additional documents, provide them immediately. They are doing what’s necessary to get your loan approved and closed. Delays in providing documents can result in a costly delays.

8.     Not getting a rate lock in writing.  When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program.

9.     Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal!

10.  Getting a second mortgage before you refinance your first mortgage. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down.