By: Ben Afzal
Refinance mistakes can cost you thousands, even tens of thousands of dollars. Here are some quick tips to help you out:
1. Wrong time frame
Don’t do a refinance under time pressure. Always be sure you can walk away from a refinance if you are surprised by last minute (usually more expensive) changes to the loan you were expecting. These kinds of shenanigans happen. Sometimes people sign up for a bad deal because they need the money quickly, but could have avoided this with a little planning.
It is harder to walk away from a loan when it is a purchase loan. Make sure the broker or lender verifies in writing the final interest rate that was locked in, so there are no surprises.
2. Pay too much closing costs
Closing costs can vary greatly between borrowers and between mortgage brokers. A point is 1% of the loan size. If someone charges you 2 points on a $600,000 loan, that is $12,000.
Make sure you get a good faith estimate within 3 days of the loan application. Compare these carefully from multiple sources. Make sure the estimates are thorough so that you are comparing the same items across different offers. If a mortgage broker leaves off certain costs, such as property taxes or prepaid items, then their offer may seem much cheaper when it actually won’t be. Also make sure the quotes are for the same type of loan (30 year fixed, 5 year interest only, etc.) so you are comparing the same loan types. Otherwise you are comparing apples and oranges.
3. Not locking your interest rate properly
Your mortgage broker “locks in” your final interest rate with the lender. You can request a copy of this rate-lock prior to having to sign the loan documents. That way you know which interest rate to expect, and you won’t be hit by any last minute surprises.
4. Wrong loan type
There are many different loan options out there. Make sure these are explained to you thoroughly. This is your chance to get free advice from multiple sources. For some people a 30 year fixed loan is appropriate, and for some people an interest-only loan with lower payments may be better.
5. High prepay
Some loans come with a prepayment penalty. Find out how long this payment penalty period exists for, and how much it will cost. If you plan on leaving your house in a year, and your prepayment penalty is for 2 years, you will end up paying that prepayment penalty in the future. Sometimes accepting a prepayment penalty for the short term can lead to a lower rate. If you accept a prepayment penalty of one year for an interest rate, but reasonably expect to be in the property for another five years, then this is something to consider.
6. Paying a prepay
Your current loan may have a prepayment penalty. Some lenders waive their prepayment penalty if you refinance with them again. Sometimes this prepayment penalty waiver is prorated from your old loan. For example, if you have one year of a prepayment penalty left on a three year prepayment penalty, then your new loan with the same lender will carry over that one year prepayment penalty.
7. Fixed for long time frame
If you plan on keeping the house for 10 years and get a loan that is fixed only for 5 years, you are exposing yourself to the risk of a higher interest rate in 5 years. Interest rates may be lower or higher at that time, but if you have a 30 year fixed loan you don’t have to worry about that for 30 years.
8. Hard/soft prepay
A hard prepayment penalty is triggered if the loan is refinanced or the house is sold. A soft prepayment penalty is only triggered by a refinance, so if you sell the house then there is no prepayment penalty. A soft prepayment penalty gives you more options.
9. Borrow too much
There are lots of aggressive loan options and lenders out there. It can be relatively easy and tempting to cash out a lot of equity. Make sure you can afford the new payment, and that the cash you are taking out is for reasonable purposes.