If you’re considering taking advantage of today’s lowest refinance rates the mortgage process can be expensive and intimidating. There’s a lot to take in and mistakes can cost you thousands of dollars. Many homeowners take the easy way out by focusing on just one aspect of mortgage refinancing like getting the lowest refinance rates. With that in mind, here’s a list of seven common mortgage mistakes to avoid when refinancing your home.
- Neglecting To Do Your Homework
- Not Checking Your Credit First
- Not Shopping Around From Today’s Best Mortgage Lenders
- Choosing a Mortgage Solely Based On Refinance Rates
- Not Considering ALL Closing Costs
- Not Paying Attention To Your Closing Documents
- Giving Into a Pressure Sales Pitch
For most of us our homes are the single largest purchase we make…ever. Despite this many people barrel through refinancing like they’re buying a kitchen appliance. This approach almost always results in overpaying at every turn.
Investing the time necessary to learn about home loans and mortgage refinancing will help you avoid common mortgage mistakes like paying discount points or comparison shopping with the Annual Percentage Rate.
Understanding how your credit affects your mortgage rates, your home loan’s amortization, mortgage insurance and the Truth-in-Lending disclosures will save you a lot of money as a homeowner.
Using a basic mortgage calculator when budgeting for your mortgage payment also helps choose a term length that saves you money without stretching your budget. Not sure where to start doing your homework? My Underground Mortgage Videos have the information you need to avoid paying lender junk fees in one place for just an hour of your time.
The refinance rate quotes you get when shopping for your next home loan are based on your credit. If the refinance rates you’re being offered are higher than what lenders are advertising the likely culprit is your credit score.
Before you do anything else when refinancing the first thing you need to do is check your credit reports for errors. Nothing will sink your credit score faster than having negative information incorrectly reported on your credit reports. Visit AnnualCreditReport.com to get free copies of your credit reports once per year.
Most banks and credit unions offer low cost credit monitoring services that allow you to monitor changes in your credit score. Once you’ve reviewed your credit reports and are satisfied that they’re accurate the quickest way to improve your credit score is to pay down the balances on all of your credit cards below 30% of the credit limit.
Be sure and allow enough time for the new balances or corrections to affect your credit score before you begin shopping for the lowest refinance rates; this is where a credit monitoring service can come in handy.
You’d be surprised how many of your neighbors don’t put out the effort to shop around for their mortgage. Most simply pick the lender advertising the lowest APR in your area. Others simply rely on their bank as a matter of convenience. Either way the majority of your neighbors paid too much for their home loans.
Truth be told mortgage offers and fees vary significantly from one mortgage lender to the next. Most lenders have their marketing department structure their home loan offers and manipulate the Annual Percentage Rate with discount points to make them seem more attractive. This is why choosing the mortgage quote with the lowest APR often gets you the highest out-of-pocket expenses.
Don’t assume that major banks like Bank of America or Wells Fargo will have the best deals. Often you’ll find the lowest fees come from local community based credit unions, many of which have membership open to the public.
Bonus Tip: Never choose a mortgage based on the Annual Percentage Rate. Base your decision on the fees found in section 800 of your HUD-1 Settlement Statement AND zero point refinance rates.
This is probably the single most common mortgage mistake and it’s easy to understand why. The refinance rates you get along with term length affect what your payment will be month in and out. You might think the fees you’re paying are a small price to pay for getting the lowest payment; however, they can quickly turn that low refinance rate into an expensive mistake.
This is why the break-even point is so important with mortgage refinancing. Basically if you’re not able to recoup the fees you’re paying for loan origination and any unnecessary discount points you’re going to be losing money no matter how low your interest rate.
You can approximate your break-even point by adding up all of the fees you’re paying at closing and dividing by how much your mortgage payment will go down each month. Suppose you’re saving $80 a month by refinancing and it’s going to cost you $4,000 to close. Your break-even point is 50 months, ($80/$4000 = 50) which is just over 4 years.
If you sell or refinance again before breaking even you’re going to be losing money no matter how attractive the interest rate. It’s worth noting that this calculation is only valid if you keep the same term length when refinancing. That is, choosing a 30-year fixed rate mortgage to replace your existing 30-year mortgage. If you choose a home loan with a longer term-length it’s going to be impossible to break even because of the higher finance charges over the lifetime of your home loan.
There are more fees to consider than your loan origination fee as well as tax considerations. Remember while getting today’s lowest refinance rates might do wonders for your monthly payment your mortgage interest tax deduction is going to be much smaller come April.
Other considerations include mortgage insurance, which can drive your payment up by hundreds of dollars, property taxes, and your homeowners insurance.
This is why using a mortgage calculator when refinancing can help you plan your budget, which needs to include all of these secondary expenses.
Closing on a new mortgage is all about paperwork. There’s a contract to sign and a whole lot of disclosure documents. The truth-in-lending disclosure statement, Good Faith Estimate, and the HUD-1 Settlement Statement can be confusing and often have different amounts for the same fees.
Remember your Good Faith Estimate is only an estimate and could change fore your sign the final documents. (Pay close attention to and question all section 800 fees.)
When it comes to fees your HUD-1 Settlement Statement is the final word and should be carefully reviewed to make sure there are no surprises.
What can you do if you’ve closed and find something on the HUD-1 that’s not correct? You have three business days to change your mind when refinancing before the mortgage loan is funded. You can walk away at any time during three business days (including Saturday) and you’ll probably only be out the application or rate lock fee.
This period is your mortgage refinancing three-day rescission period so if you catch something after closing your have a parachute if you want to walk away from the loan. Loan officers don’t like to talk about the rescission period but if you’d like to execute your rights you’ll need to notify both the lender and your broker in writing (by fax).
Don’t let a pushy loan officer or mortgage broker pressure you into a bad home loan. Remember these people are salespeople and their commission often depends on how much you’re paying (or overpaying).
Despite new regulations intended to protect homeowners many lenders and mortgage brokers engage in deceptive practices intended to push you into an overpriced home loan.
Pressure sales tactics include steering you to a mortgage with junk fees including unnecessary discount points. Rate lock fees, administrative fees, application fees and processing fees are all garbage and can be negotiated away as a condition of getting your business.
Even if you don’t have the cash to pay for closing and are accepting higher refinance rates in exchange for having the lender pay your closing costs you still need to pay attention to the fees you’re being charged. Anything you’re paying out-of-pocket or trading for a higher interest rate reduces the benefit you’re getting from mortgage refinancing.
Finally, make sure you’re getting everything in writing, including your rate lock. If you don’t have your mortgage terms and lock in writing it never happened. Don’t expect a lender to honor any terms that you don’t have in writing up front.
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