The process of getting a refinance loan is similar to getting a mortgage loan for the first time. Refinancing involves a lot of money towards the payment of closing costs. Therefore, you should be aware of the pros and cons of the process and its various aspects. This will help you avoid problems in refinancing. However, there are some common mistakes that mortgage seekers often commit while opting for a refinance loan. Knowing some of these can help you choose a suitable loan program and manage it well.
Refinancing with your present lender without shopping around
There is a general conception that it is easier to deal with your present lender. But your existing lender may not offer better rates and terms compared to others. Therefore, it is better that you shop around for the loan programs with affordable terms and conditions so that you don't end up paying higher fees and interests. Even if you have made your payments in time, your present lender will verify your income, assets, credit status and liabilities provided you refinance with the same lender.
- Not calculating the break-even period
You should know about the total cost involved in refinancing. This helps to calculate your savings and then find out the time period over which you can make up for the costs. This time period is the break-even period and it can be found by dividing the total cost by the monthly savings.
- Not obtained a Good Faith Estimate of closing costs
You should obtain a Good Faith Estimate of the closing costs associated with the refinance loan. Otherwise, you cannot detect whether any hidden fees are included in the transaction cost. An analysis of the various costs involved in refinancing prevents you from paying higher fees and helps you to select a cost effective loan program. You should check out that your lender provides a Good Faith Estimate within 3 business days of receiving your loan application.
- Conducting an appraisal when your home value is too low
If you are doubtful about the value of your home, it is better not to approach a third party for its appraisal. Rather you can ask your present lender to conduct the appraisal, provided you approach him for a refinance loan.
- Signing loan documents without proper review
There are cases when borrowers sign loan documents without thorough checking. These documents are standard ones and are easily available for review. Since you may not be able to read all of them at the time of closing, therefore it is better that you review them in advance and then sign them.
- Not providing relevant documents to your lender in time
You can prevent unnecessary delays in closing if you submit relevant documents to your lender in time. This may prevent you from paying high interest rates, provided you lock in at low interest rates before closing.
- Not obtained a rate lock in writing
It is better if you can get the rate lock in writing from your lender. This written statement includes your interest rate, length of rate lock and other details of the loan program.
- Taking cash from your credit line before refinancing the first mortgage
There are borrowers who utilize the cash from a refinance loan for purposes other than home improvement. Lenders generally consider such cases as cash out refinancing and this may require stringent qualifying criteria. In some cases, lenders may also break off the mortgage deal.
- Applying for a second mortgage before refinancing the first mortgage
There are cases when borrowers take a second mortgage before refinancing the first loan. In such cases, lenders consider the total amount of the two mortgages while approving the refinance loan. But if you wish to refinance your first loan, just check out if it is possible to refinance while you take a second mortgage.
An awareness of these mistakes will help you carry out the deal in a better way, and overcome problems in your mortgage. This will prevent you from paying hidden costs associated with the transaction and help you to pay off the first loan with another loan so that you can benefit from low interest rates and better terms and conditions.
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