What are the basic refinance mistakes and ways to avoid them?

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By: tiarajoseph11
on 23rd Jul,2015

If you find your mortgage rates rising higher, you can still lower it with few wise options. Out of them, refinancing is the best for you.
avoid-refinance-mistakes


If somehow you notice that your home loan rate is creeping higher, you can still lower it with a few wise options. Among those effective options, refinance will be the best choice for you.

Here are some common refinance mistakes which might demolish your chances, know them well to avoid:

No. 1: Lack of basic preparation

You must do your own research before contacting a mortgage lender. For first time buyers, you must be aware of your credit score, which will determine how much you're gonna be getting as the rate.

Also, determine your home's net worth by consulting a realtor. You can also visit zillow.com to get more details. After getting sufficient information, compare several mortgage rates from the advertisements given by various lenders. The next thing you should do is to estimate your new monthly mortgage payment after calculating it using a refinance calculator.

No. 2: New credit creation and building up debts

Lender will surely check your credit score when you apply for a refinance, and they will re-verify it again before settlement. It should be clear to you that, if you make any big purchases through your credit card or apply for a new credit, it might delay the approval process of your refinance application. It may get worse and you could get rejected also. You must understand that whenever you create a new credit card account, your total credit score falls. The more your credit score drops, the more you'll have to pay.

No. 3: Maintaining low credit score

What is the perfect credit score which will be helpful for you to get an easy refinance? It depends upon many criteria. A standard conventional loan may need a credit score nearly 660 or may be a bit higher. In case of FHA loan, if you have 640 or higher credit score, most of the lenders will agree to strike a deal with you. But you must remember, as soon as your credit score drops to drop 639, you will lose 25% of your prospective lenders.

If you have score of 620 or less, you can get only 10% of the total lenders on your side. It will drop down to 2%, which is a very huge drop, if your credit score drops to 600.

No. 4: Not shopping enough before picking the old lender

Your current lender can be your preferable choice. But in the long run, you cannot avoid new options from a new lender, but it may also cost you a lot. You can't expect a better offer every time from your old lender, so you must compare your lender's quote with other prospective lenders. Communicate with various lenders on a same date as the refinance rates can differ day by day.

Apart from the interest rates, you must also check various lender's fee structures. Don't forget to get all quotes in hard copy writing. If you don't get good offers, inform your current lender about this and you might be getting a much better deal. If not, refinance from any other lender.

No. 5: Forgetting to assume all costs

The key goal of a refinance is to lowering your monthly payments. But it is not the only factor which you need to reduce or cut off. Before getting the refinance, you must also verify whether you have to pay any penalties or not, for paying off the first mortgage before the loan term is over.. Make sure to check your current mortgage documents. If you don't plan to live in your current house for a long time or are close to paying it off, getting a refinance will not be a wise decision.

Consider the fee amount while comparing refinance offers. Compare different scenarios by altering the loan amount. Also, look at the cost with and without charging points. Some mortgage lenders offer their existing customers with "no closing cost refinancing".

No. 6: Ignoring Key ratio

A pair of key ratios which can be devastating if you do not balance them:

Loan-to-value ratio (LTV)

LTV is nothing but your loan percentage compared to your current home value. For example, if your loan is $60,000 and your home is worth $200,000, your LTV is $60,000 divided by $200,000 or 30%. It is for sure that higher LTV is not suitable for easy refinancing, unless you probably have private mortgage insurance. It will protect the lender's interest from possible loss, that means if you can't payback the loan.

If you have high LTV on your side, Home Affordable Refinance Program, or HARP is the best available option for you to consider.

Another two options for high LTV is FHA Streamline Refinance program and U.S. Department of Veterans Affairs approved loan. You could also pay a big part of the current mortgage to lower your LTV. This method is known as a cash-in refinance.

Debt-to-income ratio (DTI)

For example, if your monthly earning is $8,000 and your monthly installments on your credit cards and other loans total $1600, your DTI will be $1600 divided by $8,000, or 20%.

Lenders can be flexible while considering the DTI ratio in refinancing approval. But it is also correct that too much debt can be harmful. High DTI will not be acceptable by most of the lenders.

No. 7: Not locking your rates

You need to lock your rates. Refinance rates can often change without any prior intimation. Make sure you contact the lender and lock it in. Normally you can lock the rate only for 30 to 60 days. It's a kind of gambling with rates and also with your instincts since you may think that the refinance rates will be lower again. But there is a chance that your assumption can go wrong, and you may lose the lower rate.

Make sure to provide proper and genuine documents, as it will take time to get approved, especially for refinance purposes. If you don't take care about this, it might cost you to extend the rate lock. But if your lender also needs time, the company generally agrees to extend the lock time without any extra charges.

Check out the key basis to refinance your mortgage.

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