Ten Pitfalls To Avoid When refinancing

10
Pitfalls To Avoid
When Refinancing
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Table Of Contents
Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 01
There Will Probably Be A Prepayment Penalty . . . . . . . . . . . . . . . Page 02
Not Taking The Refinance Fees Into Account . . . . . . . . . . . . . . . . Page 02
High Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 03
Going Against The Good Faith Statement . . . . . . . . . . . . . . . . . . . Page 03
Always Be Aware Of Foreclosure Risk . . . . . . . . . . . . . . . . . . . . . Page 05
Overestimating The Value Of Your Home . . . . . . . . . . . . . . . . . . . Page 07
Ask Yourself Why You Want To Refinance . . . . . . . . . . . . . . . . . . Page 08
Not Giving Due Attention To Short Term Loans . . . . . . . . . . . . . . . Page 09
Falling For Advertisements On Annual
Percentage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 09
Not Looking At Other Lenders And Mortgage Brokers . . . . . . . . . Page 12
Getting Started
If you compare the current mortgage rates with the historical rates, you would see that they
are quite low. So, if you are still paying a high installment on a mortgage that you got years
ago, why don’t you try and see if you can save some money by going in for refinancing.
But while a mortgage refinance can lead to lower monthly payments and help you save
money, even here there are some traps and mistakes that you should avoid. These mistakes
cannot only cost you a lot of money, but they can also lead to a foreclosure if you are not
careful. Given below are the things that you need to be careful about when you consider
getting a home refinance loan.
01
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There Will Probably Be A
Prepayment Penalty
Some mortgage contracts will include
a prepayment penalty charged by the
mortgage company. It will often be
disguised as a clause, and as a result
you may have to pay a penalty if you
refinance or sell the house prior to the
end of the loan term. Most lenders will
not include penalties for payments
before time in their contracts, but
there are some lenders who will not
only impose penalties, but will do so
excessively by charging as much as
six months’ interest on a loan’s original
balance. A borrower should know what
penalties he may have to pay before he
goes in for a refinance.
01
02
Not Taking The Refinance
Fees Into Account
Don’t focus only on monthly payments.
Lowering the monthly payment is an
important consideration when you
decide to go for a refinance. But note
that it should not be the only reason.
When you are comparing offers, look
at the fees that are piggybacking with
the refinance. Change the amount
of the loan and do a number run to
see how the upfront points affect
the costs.
Beware Of The Arbitration Clause:
An arbitration clause may also
be inserted into the contract. The
arbitration clause will allow a third
party to resolve the dispute between
the borrower and the lender. The
law guarantees some rights and
protection to homeowners, but if you
agree for arbitration, you may have
to forfeit these rights. It is better to
say no to arbitration, because it can
become a costly mistake later.
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03
High Interest Rates
Many homeowners with a good credit
score have been misled into agreeing to
bad loans by unscrupulous lenders. Their
idea is to charge the borrowers with high
rates and fees for loans to make more
money. If you are a homeowner and
you want to take a loan on an interest
rate that you think is not fair, you should
compare loan offers received from various
lenders. When you compare the rates
on the mortgage from several lenders,
it becomes easier to know which lender
you should avoid.
Also, note that wholesale lenders will
approve and settle interest rates based on
how the homeowner qualifies for the loan.
The rate of interest will then be marked
up by the lender or mortgage brokers.
This markup is known as the Yield Spread
Premium. However, you can avoid paying
the higher fee. When you receive a
written guarantee (on the interest rate)
on the mortgage from the lender, say
that you want to see the guarantee given
to the lender by their wholesale lender.
If your lender refuses this request, start
searching for lenders who are ready to
give this document to you. To examine
this guarantee is the borrower’s right.
03
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Going Against The
Good Faith Statement
The good faith agreement and the charges
mentioned on it should be reviewed. You
can avoid overpayment if you simply look at
the fees. The lender should not be charging
origination fees more than 1-1.5% of the loan
amount. Also, see if the loan fee (processing)
is higher than $400. It should not be so. If there
is anything that resembles application fees,
courier fees, broker administration fees, or
lock fees, you can refuse to pay such fees. If
the lender still won’t relent, start searching for
another lender.
04
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05
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Not Being Aware Of
Foreclosure Risk
Mortgage lenders, if they are predatory, will ask
borrowers to sign on blank or incomplete documents.
They will even exaggerate the borrower’s income on
the loan document so that the latter can qualify for the
loan. It is not only dishonest on the part of the lender,
but it is probably done so that the refinance loan can be
engineered to default. The borrower must do necessary
research on such loan offers so that they can recognize
lenders who are dishonest.
Sometimes a broker or a lender will tell you that they will
help you refinance a loan that will not require you to pay
any fees from your pocket. Your previous lender may
also tell you that they will not charge you any closing
costs if you refinance an existing loan. Whenever such
an offer is made, be careful. The monthly mortgage
payments might be incorporating such closing costs.
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06
Overestimating The
Value Of Your Home
Homeowners often overestimate the
values of their house in the absence
of a proper appraisal. When a proper
appraisal is conducted and later when
homeowners are told of the real value of
their home, they are surprised. Appraisals
will cost a lot of money, somewhere in
the range of $200 and $300. They are
conducted by certified appraisers who
consider a number of factors to arrive at
an approximate value for your home. The
lending institution may call for a home
appraisal before they agree to refinance.
If after realizing the value of your home,
you decide not to go for a refinance, you
might still have to pay appraisal fees, at
the very least.
To be on the safer side, get an estimated
value of your home, either by checking
the local public records or by getting a
comparative market analysis done by
a real estate professional. Note that
the comparative market analysis is an
informal estimate only. There are also
some websites which can give you a fair
estimate of local property prices by taking
into account recent refinance transactions
or home sales in your locality.
07
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07
Not Asking Yourself
Why You Want To Refinance
People go in for refinance for different
reasons. Some homeowners simply want
their mortgage rate to be reduced.
However, such a move may not always be
to the homeowner’s advantage. The fees
for the new refinance loan may be more
than the gains the borrower will get from
a reduction in the rate. To make good
decisions, borrowers must take some time
out and think over their reasons carefully.
Some other reasons for refinancing
could include home improvements, debt
consolidations, or big purchases. There can
also be financial or personal reasons, like
taking a loan for the cash to purchase a car.
Interest payments can also be deducted
on tax returns when some purchases are
made with the cash obtained from a loan.
Before you make such decisions, consult
an attorney (tax), an accountant, or a
financial planner.
Note The Service Quality:
By choosing a mortgage lender whose
service quality is excellent, you can
avoid several pitfalls. Accomplishing the
refinance in the shortest period of time with
as little hassle as possible should be your
goal. You can ask mortgage brokers for
details about performance guarantees and
service plans.
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08
08
Not Giving Due Attention
To Short Term Loans
Some people go in for refinancing so that
the monthly payments are lowered. But in
many cases, it may actually make sense
if you refinance the original mortgage to
get a shorter loan term. For example, if
you switch a mortgage for 30 years into a
15 year loan, you will actually pay off the
mortgage loan sooner.
If you are not worried about your finances
changing at least for a few years, you can
go in for a 30 year refinance mortgage
loan (with lower rate of interest) and
make bigger payments (by paying extra
toward the principal) like you would for
a loan for 15 years. This way you can
save interest money while still preserving
payment flexibility.
Think About Getting A Life Insurance
For Your Refinance Mortgage:
If you are elderly or in otherwise poor
health condition, you should think about
getting a life insurance for your refinance
mortgage. This plan will ensure that
your family and your home will be safe
if anything happens to you. This is
because your loan will be paid off with the
insurance money. When you are young
and your health is good or you have
considerable savings, then the advantage
of investing in such an insurance policy
is limited.
09
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Falling For Annual
Percentage Rate Advertisements
Mortgage brokers often use the APR or Annual
Percentage Rate to get a homeowner’s
attention. These rates are based on a
mortgage for 30 years and the plan is actually
an accelerated repayment scheme. Many
lenders will allow a homeowner to go for this
kind of plan, if the homeowner asks for it. Most
importantly, note the actual rate of interest so
that you can compare mortgage loans. Also
being familiar with payment plans will help you
to avoid surprises later on.
09
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11
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Not Looking At What Other
Lenders/Brokers Are Offering
While refinancing with your present mortgage lender
can be convenient, it may not be in your best interest.
You may deserve a lower mortgage rate, but the lender
may not offer it to you for various other reasons. You
should inquire for rates, terms, and information on other
loan products from your mortgage lender. It is in your
best interest to be well-informed. You can potentially
save or lose a lot of money because of small details.
Get The Closing Costs Upfront:
Closing costs can only be estimated when a mortgage
loan’s details are clear. The closing costs can be
calculated in different ways, so always be ready and
expect the worst. This way you can be prepared for it
later. The law says that closing costs must be disclosed
to borrowers inside of three days of the application being
made. The lender is expected to make such disclosures
in time and it should be upfront.
Exercise The ‘Rescission Right’:
If you refinance your loan with another mortgage lender,
you can still cancel the deal until three business days
are over. If you think you’ve got a raw deal and you
want to cancel the loan, you can use this right. A letter
must be sent to the lender saying that the refinance is
being canceled by you (through registered mail for the
return receipt).
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C orporate O ffice
201 Old Country Road, Suite 140
Melville, NY 11747
On US: 800-Loans-15
[email protected] • www.USMortgage.com
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