Mistakes to Avoid When Refinancing
People refinance for various reasons and with different results. Some homeowners refinance for a lower interest rate, thus a lower monthly payment, while others may refinance for some cash-out or even a debt consolidation loan. Homeowners also commonly refinance their home to change programs. For example, to go from a 30-year fixed mortgage rate to a 15-year fixed mortgage rate. Refinancing an owner-occupied home to become a rental home is also a reason to refinance. Whatever the reason might be, there are mistakes to avoid when refinancing.
One of the most common mistakes to avoid when refinancing is paying too much in closing costs. Closing costs can be anything from an appraisal fee to a “lock-in” fee, underwriting and processing fee and many others depending upon the lender. The best way to avoid paying too much in closing costs is to ask for the Good Faith Estimate in the beginning of the process. The Good Faith Estimate is a one-page document with a break-down of every single cost involved in the process, as well as the interest rate, terms, and other important information. It is common to have to pay for an appraisal; however, it is recommended to shop around for a lender with low underwriting and processing fees on the GFE.
It is very common for a homeowner to have a “pre-payment penalty” attached to their current mortgage. This means that when the closing documents were signed for the original loan, the borrowers agreed to pay a pre-payment penalty if they paid off the mortgage within a specified amount of time. Usually the pre-payment penalty period is two years. For example, if the Jones”s closed on their home in January of 2008 and there was a pre-payment penalty, if they refinance in November of 2009 they will have to pay a fee to the lender for paying off the initial mortgage too quickly. Paying a pre-payment penalty is a common mistake to avoid when refinancing that can be avoided by simply waiting until that period is up.
Borrowing Too Much
Another common mistake to avoid when refinancing is borrowing too much money. For example, the house is worth $125,000 and the homeowners owe $75,000. They want to consolidate debts which total around $10,000. A big mistake in this situation is to take out more than is really needed for the purpose. Homeowners might be tempted to take out $25,000 to have extra money; however, that is a mistake because it will mean the homeowners have less equity in the home. Another example would be for home improvements. If home improvements would cost $25,000 that is really all the homeowners should take out during a cash-out refinance.