Below is a list of the top ten refinancing mistakes made when a homeowner looks to refinance their current mortgage. The three most popular refinance loan programs in California are Conventional, FHA, and Jumbo fixed-rate mortgages.
1. Refinancing With Your Current Lender Without Shopping Around
This is number one for a reason; it’s absolutely essential to get a few quotes before you move forward. 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 verification’s all over again.
2. Not Doing A Break-Even Analysis
This is an important step when a homeowner is trying to obtain the lowest mortgage rate. Here is how to do the 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 fixed mortgage for a 15-year fixed mortgage.
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3. Not Getting A Written “Loan Estimate” Of The Closing Costs
Within 3 working days after receipt of your completed loan application, your mortgage company is required to provide you with a written “Loan Estimate” of closing costs. The “Loan Estimate” used to be called the “Good Faith Estimate”.
4. Getting A New Car Or Other Large Purchase Before Your Refinance Closes
Avoid getting a new car (unless you’re paying cash) or opening a new credit card to make a large purchase. The reason is underwriting will have to review this transaction (which requires you to provide additional documentation) to ensure your Debt-to-Income ratio is still below the required level.
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 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).
6. 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.
7. 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.
8. 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.
9. 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, increase your mortgage rate or even break your deal!
10. 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.