There are a few things anyone shopping for a refinance loan should be aware of. Knowing how to avoid the top seven mistakes homeowners make in this process can save you lots of time and money. Here are the most important things to avoid when refinancing your home.
1. Home Value
One of the biggest mistakes people make when they consider refinancing their home is determining their home value. It is easy to get excited about the possible value of your home when you see other homes, similar to yours in your neighborhood, being listed for prices much higher than what you paid for yours. This often leads people to think their home has a lot more value than it actually has. People need to keep in mind that the prices homes are listed for are not the amounts used in determining your home value by an appraiser. Home value is determined by taking the average sale price of three homes similar in size and location which sold in the past 6 to 12 months.
People often assign more value to their homes by factoring in things to their home value which an appraiser will not. Many people add to their home value if they refinished a basement or converted a garage or porch into an extra room. If the room does not have proper HVAC vents, for example, it will not add value to your home. Other additions, such as a swimming pool or expensive landscaping do not increase the value of a home. Additionally, upgrades made to a home which are not consistent with the style throughout the home do not add value.
You can obtain a realistic home value by locating a website listing home sale prices in your area. You can take the sale prices of three homes, similar to your home, and get a good idea of what an appraiser may tell a lender your home is worth. This will give you a more realistic ballpark figure to have in mind when determining your refinancing decisions.
2. Shopping Rates
People can end up losing a lot of money in home refinancing by shopping too little or too much for good rates. A common mistake made by those who do too little shopping is going to a broker or lender without comparing them to anyone else. This happens when people decide to simply take the initial offer made to them by their current bank. Another instance is when people use someone who was recommended or a friend/relative in the industry.
Other people spend too much time shopping various brokers and lenders. This can become a waste of time and could result in a person losing out on a current low rate.
The best thing for anyone looking to refinance their home is to compare rates and products being offered by three different entities. This will give you a good idea of what is currently being offered in the marketplace. It also can provide you with information which can be used to get a broker or lender to lower interest rates, points or fees on your loan.
3. Delay Home Improvements
If you are looking to refinance your home and do home improvements, wait until after you have made it to the closing table. Too often, people get anxious about making home improvements to their home and start them too soon. If an appraiser comes into your home and finds incomplete projects it could negatively affect the determined value of your home, thus reducing your loan amount. Having implemented projects in your home could also cause your home refinancing loan to be rejected. This is why it is best to wait until you have closed before you pick up the sledgehammer.
4. Remain Accessible
When going through the process of refinancing your home you will want to make yourself as accessible as possible to your broker or lender. You want them to be able to reach you should any form of additional questions or documentation be required to get your loan processed. Being out of reach during this time could cause your loan to be rejected. This is because loan requirements are much more stringent than they were before the housing crisis. Proper documentation and strict deadlines for receiving them are now a normal part of the lending process.
5. Acquiring New Debt
There is common thought amongst those applying for a home refinance loan, especially those doing a cash-out loan. This is that they can acquire new debt or increase their debt because they are planning to pay it off with the loan they are applying for. The problem with doing this is that it has adverse effects on your DTI, or debt to income ratio. The addition of new debts, credit cards, or an increase in credit card balances can cause your DTI ratio to become outside of the acceptable range for loan approval. The best thing to do is to hold off on additional purchases until after your loan has been finalized.
6. Loan Term Selection
All too often, one of the most expensive choices people make when locking into a refinancing loan is the length of the loan they select. It is not a good idea to get past the 10th year of a 30 year home loan and being another 30 year loan. This could cost of you thousands of dollars over the course of the loan. The best thing to do is to get into a 20, 15 or 10 year loan. Although the monthly payments will be higher, doing this will save you a small fortune. All too often, people their make decisions based on the desire to have more money now. This ends up hurting their long term finances.
7. Rate Locks
Many people who get a rate lock from a lender do not take into consideration the unknown factors. For instance, if you have a 30 day rate lock on your loan, you may want to schedule closing on the loan at least a week prior to it expiring. This is because there is always the possibility of something occurring in your life you did not expect to have happen. An emergency or other unplanned event could cause you to be unable to make it to the closing table until after the lock has expired. Scheduling some cushion time helps to ensure you get the rate you were quoted and you are not facing the possibility of higher rates because of scheduling conflicts.