Refinancing your mortgage can be a great financial move. A homeowner might choose to refinance for multiple reasons.
Some of these include lowering their rate, lowering their monthly payment, eliminating private mortgage insurance (PMI), paying-off other debts, or paying for a renovation. The application and approval processes for a new mortgage require some effort and cost to the borrower. Applicants for a new refinance understandably want to make the right choices on their way to the closing table and to avoid unnecessary costs and delays. This blog explores mistakes to avoid while refinancing.
Don’t Take Out New Credit
Do not open a new credit card, buy furniture with zero-down, finance a new car, or create other new monthly payments if you plan to refinance soon. This advice is in effect before and during the application process. Lenders may pull your credit report near the closing date and any new credit lines will show up as additional monthly payments that require attention. This could result in re-underwriting of your loan to determine whether the loan-to-value ratio (LTV) still falls within the guidelines set forth by the underwriter. This could delay the closing date and may even result in your loan denial. If you’re concerned about what not to do when refinancing, taking on unnecessary debts is at the top of the list.
Don’t Make Any Major Purchases
Again, this advice applies whether the application process is about to start or has already begun. Major purchases (like a car, boat, or new furniture) often result in a new payment that will show up on your credit report. Even if you pay for the purchase with cash (and keep it off your credit report), it is still advisable to wait until after closing. Cash reserves in the bank are one factor that the underwriter will consider when determining the loan products that the lender may offer. The better financial position you are in, the better the loan terms that could be offered.
Don’t Compare on Rates Alone
When shopping for the best lender and product, the interest rate is just one of many determining factors. Yes, the rate should be competitive, but loans that differ by a few basis points (i.e. less than half a percent) may have other factors that differ as well. Look at the proposed closing costs and prepayment penalties (if any). Also, your lender or their secondary-market partner will probably service your loan for years, so check their client reviews. If you want a lender with a local presence, find one with an established history in your area.
Do Inform Yourself on the Basics
It helps to have a little background on the three basic refinance types: rate/term, cash-out, and renovation. A rate/term refinance is one that seeks to lower the rate and/or lengthen the term of the loan. Either of these scenarios should result in a lower monthly payment. A lower rate could result in less interest paid over the life of the loan. Some borrowers choose to shorten their loan term with a refinance. For example, replacing a 30-year fixed rate loan with a 15-year fixed rate loan. Shorter terms can increase the monthly payment but usually come with a lower rate and result in less interest being paid over the life of the loan.
A cash-out refinance takes advantage of your home’s equity as a vehicle for obtaining a sum of cash for other purposes. Cash-out refinance loans can be great financial tools when the market offers lower interest rates (as in right now!). Typically, underwriters see a primary residence as a safe form of collateral to balance the risk the bank will take in making the loan. The home’s value, combined with the buyer’s payment history and capacity to repay the new loan, can further lower the rate on a cash-out.
A renovation refinance is a specialized loan product where the proceeds are used for repairs or renovation to the subject property. Funds for the proposed updates will either go directly to the contractor or into an escrow account and can be used for structural as well as cosmetic projects.
In unique situations, such as a divorce, borrowers might seek a refinance when removing someone’s name from the mortgage and title to the home.
When Seeking Advice, Consider the Source
The best source of advice regarding your next refinance is your loan officer (L.O.). If you need to get into contact with a good L.O., ask your Realtor for a referral or visit www.ruoff.com/refinance to get started. The Ruoff Mortgage website also offers a host of resources for homeowners considering a refinance.
Sources that are probably not qualified to advise in the refinance of your home include: rogue internet sites, well-meaning friends and family members with no financial training, lenders who promise “too good to be true” rates, and clickbait headlines. Unfortunately, the market is rife with bad advice. Go straight to your L.O. when you’re ready to discuss whether a refinance is a logical financial choice for you.
Other Things to Watch Out For
- Your lender will probably require an onsite appraisal before issuing final approval on the loan. Keep your home in good condition.
- Your rate is not guaranteed until you lock it in with your lender. Also, rate locks expire after a predetermined number of weeks. Stay in good communication with your L.O. regarding your rate and let them know right away if you think you’ll need an extension.
- Despite their best efforts, the media and even seasoned financial analysts cannot predict rate fluctuations with 100% certainty. If you wait to lock, the rate might go up.
- Be sure to read the Good Faith Estimate provided by your prospective lender. This useful document shows the rate you are likely to get (when you lock), anticipated closing costs, loan type, and other costs associated with your prospective loan product. The GFE is a government-required document intended to help borrowers compare offers from different lenders.
Are you ready to talk refi? Contact a loan officer today at https://ruoff.com/find-a-loan-officer.