1/05/2011

9 Refinance Mistakes and how to avoid them

9 Refinance Mistakes and how to avoid them: "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.

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."