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Mistakes
When Refinancing You Loan
Refinancing
with your current lender without shopping
around.
Your
current lender may not have the best rates and
programs. Believing it's easier to work with
your current lender is a common misconception. In
most cases, they'll require the same documentation
as other lenders and mortgage brokers. This
is because most loans are sold on the secondary
market and have to be approved independently.
Even if you've been good at making payments
to your existing lender, they'll still have to
process the verifications all over again.
Not
doing a break-even analysis.
Determine
the total transaction costs and how much you'll
save each month by lowering your monthly mortgage
payment. Divide the transaction costs by the
monthly savings to determine the number of months
you'll have to stay in the property to recoup your
refinancing costs.
For
example, if the costs of refinancing total $2000,
and you save $50 per month, you break-even in
2000/50 = 40 months. In this case,
you should only refinance if you plan to stay in
the home for at least 40 months.
Note: The above example is suited to
comparing two similar loans when the intent is to
lower your monthly payment and recoup transaction
costs relatively quickly. Other refinancing
transactions require different kinds of analyses
which are beyond the scope of this document.
Other types of refinancing transactions
include exchanging a fixed rate for an ARM, or a
30 year mortgage for a 15 year mortgage.
Not
getting a written good-faith estimate of closing
costs.
Within
3 working days after receipt of your completed
loan application, your mortgage company is
required to provide you with a written good-faith
estimate of closing costs.
Paying
for a home appraisal when you think the
appraised value may be too low.
Have
the appraisal company conduct a desk-review
appraisal (typically at no charge) and provide you
with a range of possible values. Your
mortgage company can ask an appraiser to do this
for you. Do not waste your money on a complete
appraisal if you believe the home is unreasonably
priced.
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 help determine if they'll originate your
loan. They, like real estate agents, usually use
the sales comparison approach (formerly known as
the market data comparison approach).
Signing
documents without reading them.
Do
not sign documents in a hurry. As soon as
possible, review the documents you'll be signing
at close of escrow--including a copy of all loan
documents. This way, you can review them and
get your questions answered in a timely manner.
Do not expect to read all the documents
during the closing. There is rarely enough time to
do that.
Not
providing your mortgage company with documents
in a timely manner.
When
your mortgage company asks you for additional
paperwork--get cracking! They're trying to
get you approved! If you don't quickly
respond to your broker's requests, you could end
up paying higher rates should your rate lock
expire.
Not getting a rate lock in writing.
When
a mortgage company tells you they've locked your
rate, get a written statement detailing the
interest rate, the length of the rate lock, and
other particulars about the program.
Drawing
against your home equity credit line before you
refinance your first mortgage.
Many
lenders have "cash-out" seasoning
requirements. If you draw against your
credit line for anything other than home
improvements, they'll consider your first mortgage
refinance transaction a "cash-out"
refinance. This creates stricter lending
requirements and can, in some cases, break your
deal
Getting
a second mortgage before you refinance your
first mortgage.
Many
mortgage companies look at the combined loan
amounts (i.e., the sum of the first and second
loans) when you are refinancing only your first
loan. If you plan on refinancing your first
loan, check with your mortgage company to see if
having a second loan will cause your refinance to
be turned down.
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Not
checking to see if your credit line has a
pre-payment penalty clause.
If
you are getting a "NO FEE" credit line,
chances are it has a pre-payment penalty clause.
This can be very important (and expensive)
if you are planning to sell or refinance your home
in the next three to five years.
Getting
too large a credit line.
When
you get too large a credit line, you can be turned
down for other loans. Some lenders calculate
your credit line payments based upon the available
credit, even when your credit line has a zero
balance. Having a large credit line indicates a
large potential payment, which makes it difficult
to qualify for loans.
Not
understanding the difference between an equity
loan and a credit line.
An
equity loan is closed--i.e., you get all your
money up front, then make payments on that fixed
loan amount until the loan is paid. An
equity credit line is open--i.e., you can get an
initial advance against the line, then reuse the
line as often as you want during the period the
line is open. Most credit lines are accessed
through a checkbook or a credit card. Credit
line payments are based upon the outstanding
balance.
Use
an equity loan when you need all the money up
front--e.g. home improvements or debt
consolidation. Use a credit line if you have
an ongoing need for money or need the money for a
future event--e.g., you need to pay for your
child's college tuition in three years.
Not
checking the lifecap on your equity line.
Many
credit lines have lifecaps of 18%. Be
prepared to make high interest payments if rates
move upwards.
Getting
a credit line from your local bank without
shopping around.
Many
consumers get their credit line from the bank with
which they have their checking account. Shop
around before deciding to use your bank.
Not
getting a good-faith estimate of closing costs.
Within
three working days after receipt of your completed
loan application, your mortgage company is
required to provide you with a written good-faith
estimate of closing costs.
Assuming
that the interest on your home credit line/loan
is tax deductible.
In
some instances, the interest on your home credit
line is NOT tax deductible. It is beyond the scope
of this document to provide tax advice or quote
from the IRS code. Contact an accountant or
CPA to determine your particular situation.
Assuming
a home equity line is always cheaper than a car
loan or a credit card.
A
credit card at 6.9% can be cheaper than a credit
line at 12%, even after the tax deduction. To
compare rates, compare the effective rate of your
credit line with the rate on a credit card or auto
loan.
Effective rate = rate * (1 -
tax bracket)
Example: If the rate
of the home equity credit line is 12% and your tax
bracket is 30%, your effective rateis12% * (1 - 0.3) = 12% * 0.7 = 8.4%
If your credit card is higher than 8.4%, the
credit line is cheaper.
Besides the interest rate, you may also want to
compare monthly payments and other terms of the
loan.
Getting
a home equity credit line if you plan to
refinance your first mortgage in the near
future.
Many
mortgage companies look at the combined loan
amounts (i.e., the first loan plus the equity
line/loan) even though they are refinancing only
the first mortgage. If you plan on
refinancing your first loan, check with your
mortgage company to determine if getting a second
line/loan will cause your refinance to be turned
down.
Getting
a home equity credit line to pay off your credit
cards if your spending is out of control!
When
you pay off your credit cards with your credit
line, don't put your home on the line by charging
large amounts on your credit cards again! If
you can't manage the plastic, get rid of it!
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