Mortgage Refinance

What you need to know before refinancing your mortgage

With rates near all-time lows many people are flocking to their mortgage companies in search of a refinance.  Here are the pitfalls you need to be aware of when it comes to refinancing your mortgage.

  1. Know the terms.  Mortgage companies are required to provide you with a Good Faith Estimate within 3 days of receiving your mortgage application.  More importantly, you should get a copy of your HUD-1 form 24 hours before closing with the final numbers, including your closing costs and interest rate.  Review these numbers carefully to make sure there are no surprises, and make sure your lender knows you will not be signing any paperwork the following day if the numbers change.  Some shady loan officers will try a “bait and switch” by changing the terms against you on the day of closing, don’t fall for it.
  2. Pre-payment Penalties.  These are less common now than they were a few years ago but they still exist.  Make sure you know if you have one on your existing loan, or if the new loan will carry a pre-payment rider.  It restricts you from paying off early or refinancing your mortgage within a certain time period.  If you violate the pre-payment terms, there is typically a hefty penalty you’ll have to pay.  Avoid it.
  3. Control the closing costs.  Review the Good Faith Estimate and letter the HUD-1 Settlement Statement to understand your closing costs and any related “Points” you might be paying.  Brokers will have to disclose the Yield Spread Premium, or how much money they are making on your loan as well.  Review these terms to make sure you’re getting the best deal.
  4. Shop around.  Mortgage companies are just like any other, you can shop them.  Try looking at bankrate.com to see what the prevailing rates are in your zip code.  Make sure you are looking for a similar loan type with similar requirements to get an accurate picture of what you should be paying.  If your mortgage company isn’t competitive, call another one that wants your business more.
  5. Make sure you can afford your payment.  Just because your mortgage officer tells you that you can afford the payment, doesn’t mean you really can.  And remember, if you fall behind you risk losing your home to foreclosure.  Before you increase your mortgage balance to consolidate debt or even buy a more expensive home, run the numbers and make sure you can afford the monthly payments.
  6. Check your life insurance.  If you have dependents or really anyone that will be responsible for your estate, even if it’s modest, consider life insurance.  You want enough coverage to allow your loved ones to pay off the mortgage, or at least to give them a chance to pay for the transaction costs of selling the home, in addition to your funeral expenses.
  7. One mortgage is better than two.  If you can qualify for just a first mortgage, do it.  The rates are always much lower and it will be easier to refinance or sell if you ever need to.  Plus, you only have to write one mortgage check every month.  Avoid getting the common “piggyback” mortgage and go with a standalone first mortgage whenever possible.
  8. How long will you be in your house?  Make sure you consider the costs associated with refinancing, and compare them to the time you plan to live in your house.  If the refinance will save you some money, how long will it take to recoup the cost of the refinance based on the lower payment?  Are you going to be living in the house that long?  Run the numbers first to make sure you’re making the best decision.

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