Mortgage rates are historically low in 2010. Therefore, an increasing number of people are taking advantage of this situation by refinancing their mortgage loans. However, a mortgage loan refinance is much more complex than it was a few years ago. This is because the home values are lower and formalities are higher. It’s quite easy to make mistakes while refinancing a home loan.
Common refinance mistakes
To help you avoid some of the most common errors that can screw up a mortgage refinance, here is a list of 5 things you shouldn’t do when you refinance.
1. Not shopping around: Your current mortgage lender might not have the best rates and programs. There is a common misconception that it is less troublesome to work with your existing lender. However, in most of the cases, your present lender will ask you to give a new, updated application and the same documents as other companies/ lenders. The reason is most mortgage loans are sold on the secondary market and have to be accepted independently. The fact is despite making your mortgage payments on time, your current lender will have to verify assets, employment, and liabilities all over again.
2. Not receiving the Good Faith Estimate of closing costs: The Good Faith Estimate shows the breakdown of the total cost of the home loan, including the APR (annual percentage rate) and all other fees. You should ask for a Good Faith Estimate (GFE) while obtaining a refinance loan. The lender is supposed to provide you with a written Good Faith Estimate of closing costs within 3 working days of getting your loan application. This lets you to track any hidden cost.
3. Not doing a break-even analysis: Several people forget to determine the money they will spend to refinance while deciding whether or not to obtain a new mortgage loan. It is imperative to figure out your total transaction costs and the amount of cash you’ll save per month by reducing your monthly mortgage payment. Simply divide the transaction costs by your expected monthly savings to decide the number of months you’ll have to stay in the loan to recover your refinancing costs.
4. Assessed value of property: Mortgage lenders don’t use the county tax assessor’s value to determine if they’ll grant your loan application. They generally use the market data comparison approach. The tax assessor’s value is immaterial to the actual value of your home.
5. Making payment for an appraisal when home value is low: You must not pay for an appraisal if you believe that home has a low appraised value. Home value is determined by several factors, including location of the house. If your lender asks you to pay for an appraisal, then request your existing lender to find out the home value by using an automated valuation model (AVM). It takes into account the value of homes like yours in surrounding communities.
The last mistake that can screw up a mortgage refinance is not getting your rate lock in writing. The written document should include interest rate, length of rate lock and other data of the program.
Jessica Bennet: Jessica has lots of experience in the mortgage industry and has been associated with the MortgageFit Community as a Mentor.