You’re planning on refinancing your mortgage while the interest rates are still low. You think it’s a “piece of cake,” right? Well, not so fast. Refinance mistakes abound for homeowners who think that way. Below is a list of mistakes that can be easily avoided IF you know where the pitfalls are.
Refinance Mistakes That Most People Make
No. 1: Thinking you don’t need to do basic homework on a refinance
Just as basic homework is crucial when you plan to buy a house, it is also essential when you want to refinance. The data you will want to collect before you speak with a mortgage lender is:
- Check your credit score. You can do that for free at WisePiggy.com.
- Check your home’s current value online at Zillow.com, or you could talk to your realtor.
- Then go to HSH.com to research the latest mortgage rates and crunch some numbers with their online calculator.
According to Jill Buchanan, senior VP at MIDFLORIDA Credit Union in Lakeland, Florida:
“You can get an educated idea of the rate, closing costs and new payment without having anybody pull your credit.”
Remember though, credit rates change all the time, so this is just an “educated idea.”
No.2: Opening new credit accounts during the refinance process
One of the first things a mortgage lender will do when you apply for a refinance is to check your credit rating. Whenever you open a new credit account, it lowers the amount of credit that you have available. Charging excessively during the review time can also alter your credit standing. A lower credit score can also mean a higher mortgage rate. The purpose you are applying is to lower your current mortgage rate, so hold off on anything that will negatively affect the transaction.
No. 3: Understanding how your credit score affects your refinance rate
Joe Metzler, a mortgage consultant at Mortgages Unlimited in St. Paul, Minnesota, says:
“A standard conventional-type loan requires a (credit score of) 660 or higher to be in the game. With an FHA loan, 100 percent of lenders will work with you if you have a (score of) 640 or higher. As soon as you drop to 639, you drop to 25 percent of lenders.”
If your credit score drops below 620, you may have to rethink your desire to refinance. At a 620 score, only 10% of lenders will work with you. Below 600, it drops to only 2%. Also, the interest rate will keep rising as your credit score drops. It may not be to your benefit to refinance at some point.
No. 4: Do rate shop different lenders
This is another refinance mistake that borrowers often make. Your current lender will always be sending you information, even about refinancing, but if you shop around you may find a better deal with their competitor. Check out all mortgage lenders carefully to be sure that they are accredited and have a good reputation. If you find one that offers a better deal than the lender you currently work with, go for it. Here are some things to be aware of when checking out different lenders.
- Get finance rate quotes from all lenders on the same day (rates change from day to day)
- Get quotes in writing
- Don’t just compare lender rates, but compare lender fees as well
No. 5: Overlooking additional refinance costs
Before the refinance process begins, answer the following questions:
- Does your current mortgage have a penalty if you pay it off early?
- How much time do you have left on your current mortgage?
- Is your current mortgage almost paid off?
- Do you plan to sell your home in the near future?
- Are there upfront points that will be added to your new mortgage?
- What are the closing costs that you will have to factor in?
- If there are no closing costs, are they added to your new monthly payments?
Once you answer these questions you will know if it makes sense to go forward with a refinance or not.
No. 6: Research your key ratios
Here are the key ratios that will have a big effect on your refinance numbers. Be sure you become familiar with these ratios before you refinance.
- Loan-to-value ratio (LTV)
- Debt-to-income ratio (DTI)
No. 7: Be sure to lock in rates
Locking in quoted rates is important because of the fluctuation of the market. A locked in rate is usually guaranteed for 30 to 60 days. If the mortgage lender hasn’t approved your loan within that time, the lender should extend your lock in without charging you extra. Locking in a rate is for your peace of mind.
No. 8: Measures to take to make the refinance process less stressful
Unless you are one of the few perfect homeowners with great credit, good equity, secure income and documented assets, and solid long-term employment, the refinance process can become quite stressful. To minimize as much stress as possible be sure that the following is in place:
- You have all of the necessary documentation in hand
- You have submitted all the documentation needed from the start
- Your income source is up front from the start and is clear and concise
- Your property has been appraised ahead of time by a qualified appraiser
If, in spite of all of your careful preparation you run into problems, it is comforting to know that there is such a thing as a right of rescission. That right will give you 3 days after a refinance closing to cancel the whole deal. All you must do is send a letter (via registered mail with a return receipt) requesting a cancelation of your refinance.