Mistakes Homeowners Make When Refinancing

1. Choosing a home loan lender for the wrong reason (i.e., the lowest rate, your existing lender.)
People choose home loan lenders for all the wrong reasons.  Getting a low rate is important, but it’s not the only consideration.  Lenders may offer the lowest rate but charge extra fees (loan fees, origination fees, copy fees) so that in the end you’ll pay more for the refinanced home loan even though your rate may be lower.  The only way to protect yourself is to wait for the Loan Estimate (LE) which should list all the closing costs.   Compare the Loan Estimates from a number of home loan lenders.

But comparing LE’s is not the only story when you want to refinance your home.  If time is important, you want to choose a mortgage company that is capable of acting quickly.  Ask each company to give you their average closing time for loans similar to yours.

Ask around among your trusted friends.  Find out who refinanced lately and ask them what they thought of the company.  Don’t assume that your existing home loan lender is any better than a new lender.  Since most home loans are sold in the secondary market, everyone has to meet certain criteria, and your existing lender will probably require the same documentation as a new lender.  However, once you have a commitment from a new lender, it doesn’t hurt to ask your existing lender to beat it.  Often times they will.  We will get you the best rate available.

2. Not getting everything in writing about refinancing your home loan.
Get everything in writing.  No matter what the Loan Officer tells you, ask him to confirm it in writing.  Don’t believe someone when they tell you that your refinance rate is guaranteed.  Get it in writing.

3. Not knowing the appraised value of your home.
Many people go ahead and try to refinance their home without knowing the true value.  There are many places you can get an estimate of the true value of your home for purposes of refinancing.  Many realtor sites have home value estimators on their site.  For the price of listening to a mortgage company try to sell you a mortgage, you can get an approximate value for your home.

Check the recent sales in your neighborhood and try to find a comparable house in a comparable location.  Or you can ask the appraiser to do a drive by and give you a verbal estimate of the value of your home.  If it’s in the right ballpark, you can order a thorough appraisal.  Know the value of your home before you seek to refinance your home loan.

4. Not doing the math when refinancing your home loan.
Do the math. Refinancing your home has a cost.  You need to see what the cost is, and then determine how long you are going to stay in your home.  For example, if you are going to stay in your home for 5 more years, and the cost of refinancing your home is $5000, you need to save at least $1000 a year in order for the deal to make sense.  If you only save $50 a month as a result of refinancing (that’s $600 a year), you’ll be losing money.

5. Not considering a 2nd Mortgage.
When you refinance your home, you are refinancing the total amount.  Suppose you have a home that is now worth $400,000, and you only owe $250,000 on the home and you want to take out $50,000.  If you refinance and take out $50,000 in cash your new loan may be for $310,000, ($250,000 owed + $50,000 cash out + a total refinance cost of 3% or $10,000).  It may be better to take out a 2nd mortgage for $50,000 and pay a slightly higher interest rate and slightly higher points, but only have a basis of $50,000 instead of the $310,000.

Robert

Managing Partner, Peak Home Loans, LLC

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