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8 common refinance mistakes

 

Refinance MistakesEven as mortgage rates creep higher, there's still time to dump your current mortgage rate for a lower one. But you don't want to ruin your chance at a refinance by making a simple mistake.

Here are eight common refinance mistakes to avoid.

No. 1: Failing to do your basic homework

Before you call mortgage lenders, do your own basic research, says Jill Buchanan, senior vice president at MIDFLORIDA Credit Union in Lakeland, Florida.

For starters, know your credit score, which is key to determining the rate you will receive. You can check your credit score for free at WisePiggy.com.

Also, get a general idea of your home's worth by checking home-valuation sites such as Zillow.com or by talking to a Realtor.

Armed with that information, visit HSH.com to view advertised mortgage rates from various lenders. Then, use a refinance calculator to estimate your new monthly mortgage payment.

"You can get an educated idea of the rate, closing costs and new payment without having anybody pull your credit," Buchanan says.

No. 2: Opening new credit accounts and running up debt

Lenders check your credit when you apply for a refinance, and they check it again just before settlement, says Frank Donnelly, chairman of the Mortgage Bankers Association of Metropolitan Washington, D.C.

Making major purchases on credit or applying for new credit could lead to delays in the approval process, Donnelly says. "In the worst case, you could get rejected.”

Every time you open a new credit account, your credit score drops. Lower credit scores translate into higher mortgage rates.

"They will save $100 on a new TV if they open a store credit card, but wind up paying thousands more on their refinance," says Todd Huettner president of Huettner Capital.

No. 3: Having a low credit score

How good does your credit score need to be to get a refinance? It depends, says Joe Metzler, a mortgage consultant at Mortgages Unlimited in St. Paul, Minnesota.

"A standard conventional-type loan requires a (credit score of) 660 or higher to be in the game," Metzler explains. "With an FHA loan, 100 percent of lenders will work with you if you have a (score of) 640 of higher. As soon as you drop to 639, you drop to 25 percent of lenders."

Less than 10 percent of lenders work with borrowers whose credit score is below 620, Metzler says. That number drops to 2 percent of lenders for borrowers with scores below 600.

No. 4: Refinancing with your current lender without rate shopping

It can be convenient to simply refinance with your current lender. But failing to compare rates can be costly over the long run. 

Do not assume that your lender will give you a special deal. Instead, compare your lender's quote with others.

Check with various lenders on the same day because refinance rates can vary from day to day, Donnelly says.

In addition to the interest rate, you also need to compare the fees lenders charge for making the loan.

"Make sure you're comparing apples to apples," Donnelly says.

Get all quotes in writing. If you can do better elsewhere, inform your current lender and you may be offered a better deal. If not, refinance elsewhere for a lower rate.

No. 5: Forgetting to consider all costs

Lowering your monthly payment is a key goal of any refinance. But it should not be the only factor you weigh.

Before you even begin the refinance process, check your current mortgage documents to make sure your loan doesn't contain a penalty if you pay off your mortgage early, says Dana DeSarno lending spokesman for Navy Federal Credit Union.

Weigh the amount of time you have left on your current mortgage, and factor in the refinance's closing costs, Buchanan says. If you don't plan to stay in your house very long or are close to paying it off, a refinance may not make sense.

Look at all fees when comparing refinance offers. Run the numbers on different scenarios by changing the loan amount, and looking at the cost with and without upfront points.

Some mortgage lenders may offer no closing costs on refinancing to existing customers. But be on guard: Find out if the closing costs are being incorporated into the monthly mortgage payments.       

No. 6: Ignoring the key ratios

A pair of key ratios can have a big impact on the success of your refinance numbers:

Loan-to-value ratio (LTV)

This is your loan amount expressed as a percentage of your home's current value. For example, if you want to borrow $80,000 and your home is worth $100,000, your LTV is $80,000 divided by $100,000 or 80 percent.

A higher LTV won't preclude refinancing, but you'll probably have to purchase mortgage insurance, which protects the lender's interest if you default on your loan.

If your LTV is on the high side, one option to consider might be the Home Affordable Refinance Program, or HARP

Two other high-LTV options might be the FHA Streamline Refinance program (if your loan is insured by the Federal Housing Administration) or a loan guaranteed by the U.S. Department of Veterans Affairs.

You could also lower your LTV by paying off a chunk of your mortgage. This approach is known as a cash-in refinance.

Debt-to-income ratio (DTI)

This measures your capacity to pay your debts. For example, if your monthly income is $4,000 and your monthly minimum payments on your credit cards and other non-housing loans total $800, your DTI is $800 divided by $4,000, or 20 percent.

Lenders' DTI guidelines can be somewhat flexible, but if you are carrying a high debt load relative to your earnings, your DTI might be a barrier to refinancing.

No. 7: Not locking in rates

Since mortgage refinance rates can change often, make sure you lock it in a rate with your lender, Donnelly says. Typically a lock is for 30 or 60 days.

While you may be optimistic that mortgage rates will dip again, "it's kind of gambling with rates," Buchanan says. "It can backfire on you."

It can take time to get a refinance approved, so be sure to submit the required documentation as soon as possible, Donnelly says. If you drag your feet, you might have to pay a fee to extend the rate lock. But if your lender needs more time, the company usually will extend the lock without charging extra.

No. 8: Overlooking the possibility that things could go wrong

The refinance process can be relatively straightforward for homeowners with great credit, strong equity positions, full income and asset documentation, and long-standing employment.

But not every American homeowner fits this perfect mold. As a result, the refinance process can be bumpy.

"Many things can go wrong," says Malcolm Hollensteiner, director of retail lending sales with TD Bank in Vienna, Virginia.

Examples of things that can slow down or derail a refinance include:

  • Documentation not submitted in a timely manner
  • A borrower's income scenario that is not illustrated in a clear and concise manner
  • A property appraisal that comes in below the expected value, requiring the financing to be changed to reflect the appraised value

When all is said and done, the refinance process could stretch out to 90 days, says Gregg Busch, vice president of First Savings Mortgage Corporation in McLean, Virginia.

Because things can go wrong, be prepared to exercise your right of rescission. When you refinance a home loan with a different mortgage lender, you have three business days after closing to cancel the deal.

If you get cold feet and want to exercise this right, send a letter stating that you are canceling the refinance via registered mail with a return receipt.

(Image: Nigel Carse/iStock)

(Marcie Geffner and Gina Pogol contributed to this article)

About the author:

Susan LadikaSusan Ladika has been a writer and editor for more than two decades, getting her start at daily newspapers such as The Tampa Tribune and the St. Petersburg Times, and with The Associated Press. In recent years she’s focused on personal finance, business and HR topics, writing for such publications as Bankrate.com, CreditCards.com, Insurance.com, CarInsurance.com and Workforce Management.

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