Top 10 Things Everyone Should Know Before They Refinance
Good and bad housing markets come and go, but no matter what the housing market looks like when you’re trying to decide whether to refinance your home, you have to be smart about it. Messing up any one of these items before you refinance can leave you in a worse financial situation than you started with in the first place.
Top 10 Things Everyone Should Know Before They Refinance a Home
Refinancing a home is no simple task. Sure, there are mortgage lenders and mortgage loan originators who are very good at guiding you along the way, but you need to be sure you’ve done your homework so you can avoid situations that may arise.
It’s like when you go to the mechanic with a new car under warranty vs. a used one. With the new car under warranty, you take it in, get whatever maintenance done they suggest, and leave with little or no money out of pocket. Hey, it’s nice to live worry free, right?
However, with a used car, you’re likely to get taken for a ride if you don’t know at least a little bit about how car repairs work and what they should cost on average.
The same goes for your “used” home. You’ve taken out a first mortgage, and now you want to refinance it a better rate for any one of several reasons. Maybe you just want the long term savings. Perhaps you need to pay some unexpected expenses. Whatever the case, you need to be smart about your home refinance. Knowing these 10 things to watch out for will help you do just that.
One: Don’t just refinance with your current lender without even looking around at others.
Even if you have the very best relationship with you current lender, there is absolutely no reason for not shopping your refinance options around a bit. It’s your money, and you have every right to try and save as much of it as possible.
Think working with your current lender will save you time and effort with paperwork? Think again.
There is every chance your current lender will ask you for the exact same documentation a new lender would. Even if you’ve been on time with all of your mortgage payments, your existing lender will still have to verify assets, liabilities, employment, etc. all over again. The reason for this is that your loan was likely sold to the secondary market by your existing lender soon after you took it out, so that they could get more money to lend to other home owners.
Two: Be sure you want to stay in the home long enough to break even on the loan costs.
You need to be sure that refinancing your home loan is a smart move. First, calculate the total cost of the loan, including any financing or closing costs, appraisal, etc. Next, determine exactly how much you will save every month with your new loan payment.
Then, divide the total cost of your loan by the monthly savings, so you’ll know exactly how long you will need to pay on the property in order to break even.
Example: If you pay $2,000 in total loan costs, and you’re saving somewhere around $50 per month with your new loan payment, then it will take you about 40 months (8 years) to break even. If you don’t plan to stay in the home that much longer, then you should rethink your refinance.
Three: Be sure to get a written good-faith estimate of all costs related to your refinance loan.
Your mortgage loan originator will provide you with this within three business days of receiving your completed loan application and related financials. Look this over carefully so that you are fully aware of all costs associated with your loan.
Four: Don’t waste your money on an appraisal if you think your home’s value might be too low.
Before paying for an appraisal, check with a local Realtor to see if they’re willing to provide you with a comparable analysis of your home’s value. You can also check on various home valuation websites to get a general idea of what your home is worth. While these comps might not be exact to what your home is worth, you’ll be in a better knowledge position with them. Remember, you won’t be reimbursed the cost of your appraisal if the value comes in too low.
Five: Understand that the property appraiser’s valuation of your home is not current.
There is every chance that your property appraiser or tax appraiser’s website lists a value for your home that’s a little to a lot higher than what it actually is based on market pricing right now. Why? Simple.
Your taxes are based on your home’s value. The appraiser is in no hurry at all to devalue your home. You mortgage lender knows this and will use ya current market appraisal to value your home.
Six: Please read your loan documents carefully before signing them.
Does this need explanation? No. I did not think so.
Seven: When your loan originator asks you for paperwork, get it to them as soon as possible.
When you delay getting your paperwork into your loan officer’s hot little hands, she cannot do her job. In effect, you are holding up the process. Remember that in order for your loan to get to closing on time, you need to be an active and willing participant in the mortgage loan refinance process.
Eight: Be sure to get your mortgage refinance rate lock in writing.
When your mortgage loan originator tells you they have locked in your rate, be sure to get it in writing on company letterhead. In a pinch, an email from your lender will do. You want to have something to refer back to in case rates go up and your rate was floated rather than locked. You will likely be dealing with a reputable lender, but always cover yourself.
Nine: If you have a Home Equity Line of Credit (HELOC) on your home, don’t use it for now.
A lot of lenders have cash-out seasoning requirements. If you use funds from your home’s line of credit that aren’t repair related, they will consider the refinance to be a cash-out transaction. This means you will be dealing with more stringent requirements and can, in some cases, cause your refinance to fall through.
Ten: Do not get a second mortgage before refinancing your first.
When you apply for a mortgage refinance, your lender will take all of your existing mortgage costs that you’ll have to pay post refinance as combined loan amounts (i.e., the first loan plus the second). If you want to refinance and think you also want a second mortgage, ask you loan officer to see whether this would put you over the limit.