6 ways to wreck your refinance
Editor's note: This article originally ran on HSH.com. It has been reprinted here with permission.
Even as mortgage refinance rates creep higher, there's still time to dump your current mortgage rate for a lower one. But you don't want to ruin your chance at a refinance by making a simple mistake. Here are six steps to prevent you from making a common refinance mistake.
1: Do your homework
Before you call mortgage lenders, you need to first do your own basic research, says Jill Buchanan, senior vice president at MIDFLORIDA Credit Union in Lakeland, Fla.
You should know your credit score, which is key to determining the rate you'll receive. You can get a free copy of your credit report from each of the three main credit bureaus annually at AnnualCreditReport.com, though you'll need to pay extra to learn your score.
You should also have a general idea of your home's worth. Check a site such as Zillow.com or talk to a Realtor to learn what your home is worth.
Armed with that information, you can visit HSH.com to view advertised rates from various lenders, and then use a refinance calculator to get an idea of what your new monthly mortgage payment might be.
"You can get an educated idea of the rate, closing costs and new payment without having anybody pull your credit," Buchanan says.
2: Consider all the costs
There's more to refinance costs than simply current refinance rates.
You should check your current mortgage documents to make sure it doesn't contain a penalty if you pay off your mortgage within a certain amount of time, such as five years, says Dana DeSarno lending spokesman for Navy Federal Credit Union.
You also need to weigh the amount of time you have left on your current mortgage, and factor in the refinance's closing costs, Buchanan says. If you don't plan to be in your house very long or are close to paying it off, it may not worth it.
3: Shop around
Never assume your current mortgage lender will offer you the best deal.
Check with various lenders on the same day because refinance rates can vary from day to day, says Frank Donnelly, chairman of the Mortgage Bankers Association of Metropolitan Washington, D.C. "Make sure you're comparing apples to apples."
In addition to the interest rate, you also need to compare the fees lenders charge for making the loan, DeSarno says.
Fees, such as application fees, title search and insurance fees, loan origination fees and appraisal fees, can vary from lender to lender.
4: Lock in rates
Since mortgage refinance rates can change often, make sure you lock it in with your lender, Donnelly says. Often a lock is for 30 or 60 days, though they can be for shorter or longer periods of time.
While you may be optimistic that mortgage rates will dip again, "it's kind of gambling with rates," Buchanan says. "It can backfire on you."
It can take time to get a refinance approved, so be sure to submit the required documentation as soon as possible, Donnelly says. If you drag your feet, you might have to pay a fee to extend the rate lock. But if your lender needs more time, the company will typically extend the lock without charging extra.
5: Don't overestimate your home's value
We all like to think our home is worth more than our neighbor's, but you need to be realistic about the value of your home, Buchanan says.
After the housing bubble burst, many financial institutions required an 80 percent loan-to-value (LTV) ratio before you could qualify for a refinance. However, government programs like HARP have targeted underwater borrowers, giving them the chance to refinance no matter how underwater they are.
But you still need to have a fairly accurate idea of what your home is worth before you begin the process, Buchanan says, because a low appraisal can derail your refinance. An appraisal dictates how much money lenders are willing to lend to you. If your home's value is determined to be less than the preapproved loan amount, the lender cannot approve the loan.
6: Don't make new purchases on credit
Lenders check your credit when you apply for a refinance, and they check it again just before settlement, Donnelly says.
That means it's imperative that you don't make major purchases on credit or apply for new credit. If you do, Donnelly says, "it could lead to delays, or in the worst case, you could get rejected."
Susan Ladika has been a writer and editor for more than two decades, getting her start at daily newspapers such as The Tampa Tribune, the St. Petersburg Times and The Associated Press.