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Things to avoid when refinancing.
Refinancing with your existing lender without shopping around. With the advent of the secondary mortgage market many lenders are specialized based off of the functions they do best. Your current servicer may not be very good at originating loans. In most cases, the company servicing your loan will require the same documentation as other companies.
Not doing a break-even analysis. With the advent of premium pricing many times the lender can pay your closing cost while not increasing your balance providing you with a lower rate. In the event you want a lower payment determine how long it will take you to recoup your closing cost (those rolled into the loan or paid in cash). Do not consider a refinance that will take more that five years to recover costs. You may be in the home for more than five years, but you might not be in the mortgage for five years.
Note:This is a simplified break-even analysis. If you are refinancing and considering a switch from a variable rate to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
Not getting a written good-faith estimate of closing costs. Within three business days after the broker or lender receives your loan application, the lender must send a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees, which are substantially different from those contained in your GFE.
Paying for an appraisal when you think your home value may be too low. Have the appraisal company prepare a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser or the realtor that sold you the home may do this for you. Automated underwriting systems require different property valuation products that sometimes can save you money. Many times a full appraisal is not necessary. Brokers and lenders that do not use a point of sale origination system cannot tell you what type of appraisal you will need.
Using the county tax-assessor's value as the market value of your home. Lenders do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal, which may be very different from the assessed value.
Signing your loan documents without reviewing them. The HUD statement is the document you will need to give the most attention as this shows where the money goes. Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the closing appointment. Your Loan Counselor will be able to explain which documents can be modified.
Not providing documents to your mortgage company in a timely manner. Provide the documents requested by your mortgage company immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can ultimately be costly.
Not getting a rate lock in writing. Always get a written rate lock agreement that includes the interest rate, the length of the rate lock, and details about the program. Be sure to sign and return it to the lender so it is a valid contract.
Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. Occasionally this results in more expensive pricing or more stringent underwriting and can, in some cases, break the deal! If you are interested in a first and second mortgage get them at the same time unless you are making a home improvement.
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