Top 5 Mistakes People Make When Refinancing Their Home

1. Choosing a Home Loan Lender for the Wrong Reasons

Many people choose home loan lenders based on factors that may not be in their best interest. While a low rate is important, it’s not the only consideration. Lenders offering the lowest rate might also charge extra fees, such as loan fees, origination fees, or copy fees, which could end up costing you more in the long run. To protect yourself, wait for the Good-Faith Estimate (GFE) from each lender, which should detail all closing costs. Compare the GFEs from different lenders to get a clearer picture of the total cost.

Additionally, if time is a factor, select a mortgage company known for quick processing. Ask each company about their average closing time for loans similar to yours. Consult with friends who have recently refinanced and get their opinions on their lenders. Don’t assume that your current lender is necessarily better than a new one. Since most home loans are sold in the secondary market and must meet certain criteria, your existing lender will likely require similar documentation. However, once you receive a commitment from a new lender, it might be worth asking your current lender if they can offer a better deal.

2. Not Getting Everything in Writing

Always get everything in writing. Even if a Loan Officer verbally promises something, insist on a written confirmation. If a refinance rate is guaranteed, it should be documented. Having written documentation helps protect you from misunderstandings and ensures that all terms are clear and enforceable.

3. Not Knowing the Appraised Value of Your Home

Attempting to refinance without knowing your home’s true value can lead to complications. You can get an estimate from various realtor sites that offer home value estimators. Alternatively, check recent sales of comparable homes in your neighborhood or ask an appraiser for a verbal estimate. Knowing your home’s value before seeking refinancing will help you make informed decisions.

4. Not Doing the Math When Refinancing

Refinancing comes with costs, so it’s crucial to calculate whether the savings justify the expense. For example, if refinancing costs $5,000 and you plan to stay in your home for 5 more years, you should save at least $1,000 per year for the refinance to be worthwhile. If refinancing only saves you $50 a month (or $600 a year), you will end up losing money on the deal.

5. Not Considering a Second Mortgage

When refinancing, consider whether a second mortgage might be more advantageous. For instance, if your home is worth $400,000 and you owe $250,000, but you want to take out $50,000, refinancing the total amount might result in a loan of $310,000 (which includes the new cash and refinance costs). It may be more beneficial to take out a second mortgage for $50,000 with a slightly higher interest rate and points, keeping the primary mortgage balance lower.

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