Top 10 Refinancing Mistakes

When considering refinancing you home, there are many things to be aware of and avoided.

Here are 10 most common mistakes people make when refinancing a home:

1. Drawing on Your Home Equity Credit Line Before Refinancing

Many lenders have "cash-out" seasoning requirements.  This simply means that they want to see a set period of time elapse once you've withdrawn equity from your home prior to issuing a new loan. Cash-out followed by refinancing may represent a pattern of irresponsible credit use; a red flag for any lender. This can lead to stricter requirements, and a possible rejection of your loan. A typical seasoning requirement is 6 months.

If you draw money from your credit line for anything other than home improvements prior to refinancing the lender may consider your first mortgage transaction a "cash-out" refinance - simply because you accessed your credit line! "Cash-out" requirements are stricter than other types of refinance transactions and these tighter guidelines can reduce the benefit of a new loan considerably through higher costs and interest rates.

2. Taking on a Second Mortgage before Refinancing Your First Mortgage

Many mortgage companies look at the combined loan amounts (i.e., the sum of the first and second loans) even when you are only refinancing your first loan. If you plan on refinancing your first mortgage the lender may require you to pay off both your first and second mortgages. Check with your lender to see if having a second loan will cause your refinance to be impacted or turned down.

In some instances lenders may allow you to keep your existing second mortgage while refinancing your first mortgage. This is done by obtaining a "subordination agreement" from the lender who provided you with your second mortgage. Talk to your mortgage company if you are interested in keeping your second mortgage while refinancing your first.

3. Not Doing a Break Even Analysis

Don't be like so many people who fail to evaluate the money you will spend to refinance when determining whether or not to obtain a new home loan. It is important to compare your total transaction costs with how much you'll save each month by lowering your monthly mortgage payment. Simply divide the transaction costs by your anticipated monthly savings to determine the number of months you'll have to stay in the loan to recoup your refinancing costs.

For example, if the costs of refinancing total , and you save per month, your break-even point is 2000/50 = 40 months. In this case, you should only refinance if you plan to stay with the new financing 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. Fortunately, there are many online tools and resources which can help you weigh various loan options. These types of refinance transactions include switching from a fixed rate mortgage for to an adjustable rate mortgage (ARM), or shortening the loan term by exchanging a 30-year mortgage for a 15-year mortgage.

4. Paying For an Appraisal When You Think the Appraised Value May Be Too Low

Don't pay for a formal appraisal if you think that the home has a low appraised value. Home value is determined by many factors, including location of the home. Lenders and realtors use a market analysis based on the value of homes in your area to determine value. If your lender requires you to pay for an appraisal request that the appraisal company conduct an automated valuation model (AVM), a desktop comparable search, or a drive-by appraisal prior to scheduling the full appraisal of your property. It takes into consideration the value of homes like yours in surrounding communities. Avoid the high cost of formal appraisal by utilizing this approach.

Taking this first step will allow the appraisal company (or lender) to provide you with a range of possible values. This will allow you to determine if your home is priced within the expected parameters of the financing you are seeking. Especially in today's market, where home values are stabilizing or declining; it makes economic sense to save your hard-earned money if you will not qualify for the loan due to the value of the property. Do not waste your money on a complete appraisal if you believe the home is unreasonably priced.

5. Depending On Count Assessor Value When Determining the 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). The tax assessor's value is irrelevant to the actual value of your home.

Alternatively, there are numerous web sites that advertise the ability to check the value of any property online. While these sites may provide entertainment value by allowing you to view approximate values of your home and those in your neighborhood; these sites are not used by mortgage professionals or appraisers when valuing your property. Their software and valuation models have not been proven accurate and are therefore unreliable sources of information. If there is a difference in value between a sales comparison approach and an online web site; the sales comparison approach is the more reliable measure.

6. Using Your Current Lender When Refinancing

Although you may have a good history with your current lender, you may not always get the best deal when you consider refinancing. In most cases, you will not realize a time or cost savings over choosing a different company. Your original lender will require the same documentation as other lenders and mortgage brokers. Each time you refinance your financial picture needs to be re-verified. Your previous loan represented a snap shot of the past; any lender (including your current one) will need to start from scratch to verify your current financial situation. You will still be subject to re-qualification; even if you've developed a good relationship with your existing lender.

As in buying a new home, do your research and shop around for the best deal on refinancing. Generally, lenders require the same documentation and approval process that you went through when buying your home originally. Usually, a second mortgage on your home is sold on the secondary loan market and has to be independently approved. Always shop around.

7. Not Getting a Good Faith Estimate of Closing Costs

You will want a good faith estimate (GFE) when securing a refinance loan. Be sure to have this in place before proceeding. Within 3 working days after receipt of your completed loan application, your mortgage company is required to provide you with a written GFE of closing costs. However, don't make the mistake of shopping for your mortgage via a simple comparison of GFEs!

In fact, a GFE that has a substantial portion of the fees marked zero may be a warning sign that not all program fees are being disclosed up front. Make sure to inquire whether all fees are accurately reflected on the document.
Note: Many fee items on the GFE may be blank if you are considering a "no cost" refinance. In this instance your good faith estimate may have relatively few fees included.

8. Not Getting Your Rate Lock in Writing

Be sure this is in place before continuing the loan process. Know the length of time the rate lock is in effect, and insure all particulars, such as APR, closing costs, and any other fees are listed. A loan officer can quote you an interest rate and within the next few hours interest rates can change based on always changing economic data impacting Wall Street - the primary driver of interest rates. When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and other particulars about the program. This information is readily available via a Rate Lock Commitment. Request a copy of the lock for your records.

9. Signing Documents without Reading Them

Do not sign documents in a hurry. As soon as possible, request a copy of the loan documents in order to review what you'll be signing at close of escrow. This way, you can review them and get your questions answered well in advance of your signing appointment. Do not expect to read all the documents during at your closing appointment. You will feel pressure to complete them quickly due to the presence of the notary. Make sure you fully understand the mortgage documents you are signing. Be on particular look out for items such as prepayment penalties, ARM riders and the final Good Faith Estimate. Bring a copy of your original Good Faith Estimate with you to the signing table so you can compare closing costs and ensure that you are receiving the same deal you originally negotiated.

10. Delay in Getting Documentation to Your Lender

One of the most common complaints that home owners have when refinancing is that the process takes too long. While a typical refinance transaction should take less than 30 days; it is often up to you to determine how fast your new loan is ready. When your mortgage company asks you for additional paperwork or documentation--get cracking! They are working to approve your loan, and the quicker you get pertinent documents to them, the better off you are! The verifications, backup documentation and additional information they've asked you for has been required by the underwriter after the initial review of your loan. Your mortgage company is trying to get you approved!

By delaying you simply extend the refinance process. If too much time transpires between your broker's requests and your delivery of the documents you could end up with a higher interest rate should your rate lock expire.