People refinance their homes to save money and sometimes to pull
out the cash from the equity already accumulated in the property.
Refinancing makes a lot of sense for home owners who did not
have good credit when they originally bought a home, but after
paying the mortgage for a period of time their credit
score improved. Others get a new home loan to benefit from
a lower interest rate.
Here are some common mistakes to avoid when it comes to refinancing:
1. Not comparing the cost of the new home loan with the savings.
Calculate the total cost of refinancing (points, origination
fees, and various other fees) and the monthly savings
the new mortgage will bring. Then, calculate when these savings
are going to pay for the total cost of the new loan – when
you are going to break even. The general rule is: if you are planning
on keeping the property for at least long enough to break even,
you should refinance, and if not, you shouldn't .
2. Using your existing mortgage company.
Many people presume that just because they have a relationship
with a lender the process of refinancing will be much simpler.
The truth is that you will still have to jump through hoops in
order for the mortgage company to assess your financial situation.
You should shop around and get different quotes from different
banks, and possibly take advantage of promotional programs some
lenders might be running in your state or area.
3. Getting a second mortgage.
A lending company will always look at a first and a second mortgage
as one big chunk of money you owe. If you just took a second mortgage
on a house, your refinancing efforts are likely to be turned down
for some period of time.
4. Using your line of credit.
Do not use your line of credit before refinancing, unless it
is used for home improvements.
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Whenever you refinance your home, remember some basic rules:
1. By law, the lender should give you a good faith estimate
of the loan’s cost in writing.
2. Do not sign documents before understanding them completely.
3. When the lender informs you that they locked your interest
rate, request that it is in writing.
These rules (and others) are explained in more detail in: home
See also: mortgage
buying tips, home
loan shopping, home
equity loan advantages, mortgage
Related topics: mortgage
glossary, government refinance