Refinancing comes with many intricacies and it’s hard to know what to do and what not to do in order to get the best deal on your refinance. We’ve outlined some foundational tips to get started on knowing what refinance mistakes to avoid.
Refinance Mistake #1: Missing your chance to Lock In a Rate.
Lock your refinance rate in immediately!
The first refinance mistake to avoid is not locking in your interest rate immediately. The decision to refinance is typically based on the interest rates currently available—homeowners want to refinance to a lower interest rate. Too often, homeowners become overconfident in trying to “play the market.” In those cases, homeowners who leave themselves exposed to an unlocked interest rate many times end up losing by playing the market and having rates rise.
The refinance process should never take more than 25–30 days. In a normal market, interest rates do not change that much in that short of period of time—except for when they spike. There’s an old expression that says interest rates go up twice as fast as they go down. Therefore, you’re more likely to experience a rate spike upward than a rate spike downward. Because people generally refinance to lower their interest rate, you could price yourself out of any savings if you do not lock in your rate immediately when refinancing.
Refinance Mistake #2: Leaving the Refinance to a Verbal Commitment.
Get a written guarantee on your refinance closing cost!
Another mistake to avoid when refinancing is not getting a written guarantee on your closing cost. A little known secret of the mortgage industry is that most lenders will provide you with a guaranteed closing cost figure—but only if you ask for one. Financial transactions are 100% about risk mitigation. Trying to get the lowest interest rate from a legitimate lender is an example of mitigating your long-term risk. But what many people fail to understand is that closing cost are intertwined with the interest rate that you’ll receive.
Most lenders won’t tell you that they will guarantee a specific refinance closing cost figure because they are trying to mitigate their risk. After all, if you’re content with a good-faith estimate of your closing cost, it leaves the lender some wiggle room for errors on their part. Also, if an unscrupulous lender quotes you an artificially low interest rate, they may try to increase the closing costs as your closing date nears, in order to regain revenue they could possibly lose from the low rate quote. All in all, remember the old proverb “ask and you shall receive”. This phrase also applies to refinance transactions. Be sure to ask for a refinance closing cost guarantee and you shall receive one.
Refinance Mistake #3: Not Asking Who Your Appraiser Will Be.
Find out who will be appraising your home!
The next common refinancing mistake is not finding out who will be appraising your home. When refinancing your home, you will have direct contact with the person who will be conducting your appraisal? Unlike a purchase mortgage transaction (where you are not permitted to have contact with your appraiser), you are required to have such contact on a refinance transaction. Many consumers are unaware that the appraisal is not conducted for the consumer, it’s conducted for the lender. In both a refinance and a purchase transaction, the consumer receives a copy of the appraisal, but it is provided for record-keeping purposes only.
However, as a consumer, you can ask your lender to provide you with the appraiser’s name and contact information before you decide to apply for your refinance with that lender. The reason you’d want to do this is to find out how close in proximity is the appraiser to your home. This is critical because you don’t want an appraiser from another state, or even two counties over, to be providing an assessment of your home’s value based on your local market and other details. You may also want to do a web search on the appraiser to see if there’s any regulatory action that’s been taken, or a high number of consumer complaints.
Always remember, your appraised value is a direct component of the interest rate you’ll be able to receive. An accurate appraisal is essential to getting the interest rate that you are initially quoted from the lender.
Refinance Mistake #4: Acting too Slowly to Provide Relevant Information to your Lender
Provide income & asset documents quickly to your refinance lender!
The last mistake to circumvent in your refinance is not providing income and asset documentation quickly enough. As mentioned earlier, the average refinance should take about 25–30 days from application to closing. During that period of time, your lender is obtaining numerous 3rd-party verifications and reviewing your file for regulatory completeness. Also during that period of time, your lender will request documentation from you that’s required by their underwriter to meet the mortgage program guidelines. Most of what you’ll be asked for are income and asset-related, but there may be additional documents such as divorce judgments and job-related documents that they may need as well.
Legitimate lenders will let you know the date any requested documents are needed in order to avoid closing delays and potential rate-lock extension fees. Illegitimate lenders may intentionally avoid letting you know these document deadlines so that later on they can point the finger at you as the cause of the closing delay and the need to pay a costly rate-lock extension fee. To avoid being the scapegoat for a closing delay, always ask your lender what the deadline is for any document request.
To clarify, most lenders are legitimate. They are not trying to take advantage of your mistakes in order to make a little more money. But, there are still some lenders out there that are illegitimate and see your mistakes as their opportunities. In most cases, you can follow the above pointers, and avoid becoming a victim of the refinance process.
Learn more about the refinance process and how it can save you thousands of dollars if you work with the right lender. Download How to Cut 10 Years Off Your Mortgage below. You know the refinance mistakes to avoid—use How to Cut 10 Years Off Your Mortgage to learn the refinance tips to embrace.