Avoid These 5 Mistakes When Refinancing

Avoiding These 5 Mistakes When Refinancing Your Home Loan

The mortgage refinance process normally takes 30 to 45 days and for it to run smoothly in general with most lenders, however, average turnaround time at CrossCountry Mortgage, loans close in 21 days or less for a full refinance mortgage. FHA or VA Streamline Refinance mortgages take two weeks on average to close at CrossCountry Mortgage as long as everything is in order. Homeowners need to avoid these 6 mistakes when refinancing.

Avoid Mistakes When Refinancing And Prepare Ahead Of Time

Refinancing is when you get a new mortgage and pay off your existing mortgage either to get a lower monthly payment due to a reduced mortgage rate, pay off your current mortgage to get a borrower off the mortgage note such as a co-borrower, or pay off your current mortgage to get cash-out refinance mortgage. Depending on the type of refinance mortgage loan you are applying for, the mortgage process is similar to the process you went through when you first purchased your home. Borrowers will need to gather documents and paperwork required by their mortgage lender such as two years tax returns, two years W-2s, 60 days bank statements, current paycheck stubs, closing paperwork and most current mortgage statement from your current lender, and other documents pertaining to your refinance mortgage loan. By avoiding these 6 mistakes when refinancing your mortgage loan, your refinance mortgage process will run much smoother and your should not go through a stressful mortgage process.

Shop For The Right Lender And Loan Officer

It is highly recommended that you start shopping around for a mortgage lender and loan officer who you feel comfortable with.

  • Take your time in researching not just the lender but also the loan officer.
  • The internet is a powerful tool for you to begin your research.
  • Check out the reviews and testimonials of the mortgage lender.
  • Also Google the loan officer and see what types of complaints they may have as well as disciplinary actions they may have on their NMLS record.
  • Remember that there are two sides of a story and there are many loan officers who are very reputable and care of their borrowers but may have gotten some bad reviews and testimonials because of the company they have worked for.
  • A loan officer can do so much without the support of their employer.
  • For example, a loan officer can collect all docs from the borrower and have a complete package.
  • However, there are cases where mortgage companies may be short of processors and/or underwriters and may have the borrower’s file just sit which can cause delays.
  • Also, bad reviews from lenders may come from disgruntled employees or one unhappy borrower may go on a rampage by slandering a company in every single review site over and over.
  • If there are only 10 reviews about a lender and a loan officer and they are from 10 different borrowers in various different states and no positive reviews, then I would question that.
  • However, if the majority are good reviews and testimonials and there are a few less than positive reviews, you need to be open minded and decide whether the loan officer and the company you want to choose is the right professionals to represent you on your home refinance.
  • Besides checking the online reviews, you should contact the loan officer and talk to them.
  • See how fast they get back to you when you leave them a message.
  • See if they will return phone calls in the evenings and weekends.
  • The number one reason of loan officer complaints by borrowers is because loan officers do not return phone calls timely and it takes the loan officer not hours but days to call borrowers back.
  • Return phone calls is one of the most important traits a loan officer needs to have for your loan process to go smoothly. Shopping for the right loan officer and lender is a must and one of the 5 mistakes when refinancing borrowers make is not shopping for the right lender that you as a borrower can get along with.

Importance Of Maximizing Your Credit Scores Prior To Refinancing

Before you turn in all of your docs to your loan officer, make sure that you have optimized your credit scores.

  • Mortgage rates can vary greatly with your credit scores.
  • Many borrowers who have lower credit scores may not realize that you can easily boost your credit scores by just paying down your credit card balances.
  • Some consumers may have authorized user credit cards and the main cardholder may have maxed out credit cards.
  • By removing yourself as the authorized user from the main cardholder, you may be able to boost your credit scores where it will mean a large mortgage rate reduction due to your higher credit scores.
  • Conventional Loans are more credit sensitive than government loans like FHA or VA Loans.
  • To get the best possible mortgage rates on a conventional loan, you will need a 740 FICO credit score.
  • Those with credit scores under 700 FICO, you can plan on taking a major mortgage rate adjustment hit.
  • Many borrowers with no credit or active revolving credit card accounts can easily get their credit scores boosted by just getting one or two secured credit cards with at least a $500 credit card limits.
  • Each secured credit card can boost your credit scores by at least 20 or more points if you do not have any revolving credit card accounts.
  • Borrowers should also get a copy of their credit reports and carefully review each line item on their credit report to make sure it is accurate.
  • Remember that with Conventional Loans, to get the best possible mortgage rates, you will need a 740 FICO credit score.
  • Every 20 point drop of credit scores, you will get a pricing adjustment hits with Fannie Mae and/or Freddie Mac which means a higher interest rate.
  • Lower credit scores yields higher mortgage rates because lenders view lower credit score borrowers as higher risk of defaulting on their loans.

Plan Ahead On What You Are Going To Do With The Cash-Out Proceeds

Many homeowners will make the mistakes when refinancing of not properly planning on what they are going to do with the proceeds of their cash-out refinance. It is human nature to spend and cash at hand will go faster than you think. Prior to refinancing, make a list of what you need the cash for. Here are some bullet points homeowners should consider using the proceeds of their cash out refinance mortgages:

  • Does your home need home improvements such as a new roof, windows, gutters, siding, driveway, kitchen, bathroom, appliances, HVAC systems, or other high ticket items.
  • Do you have a lot of high interest debt such as double digit interest rates credit cards?
  • Do you need funding for college education?
  • Do you need money for a new business venture?
  • Do you need money for investments which will yield a higher rate of return than having money saved in the bank?

ARM Versus Fixed Rates

The fourth of 5 mistakes when refinancing is homeowners need to think hard on how long they intend in staying at the home they are refinancing.

  • If they are planning on not staying more than seven years and moving to a larger and/or smaller home, then they should consider an adjustable rate mortgage, or ARM, rather than a 30 year fixed rate mortgage.
  • Adjustable Rate Mortgages are 30 year mortgage loans but have a fixed rate period for a certain amount of years and then once that fixed rate period is over, the mortgage rates adjusts every year until the thirty year term is up.
  • The advantage of ARMs is that mortgage rates on them are much lower than fixed rate mortgages .
  • For example, a 7/1 ARM means that the mortgage rates are fixed for the first 7 years of the the 30 year mortgage term and starting year number 8, it will adjust every year until the loan is paid for in 30 years.
  • Homeowners who are refinancing their first starter home and do not plan on staying in the home for a long term should consider refinancing their home loan to an adjustable rate mortgage instead of a fixed rate mortgage.

The Final Of 5 Mistakes When Refinancing: Closing Costs And Break Even Point

There are costs associated with refinancing a home loan. Unless the lender pays all of your closing costs with a lender credit, you need to review and analyze your total closing costs and how long it will take you to break even on your refinance mortgage.

  • For example, if you save $200 per month by refinancing your mortgage and it costs you $2,400 in  closing costs and fees, it will take you two years to break even on your refinance.
  • If you were to sell your home in less than the two years recapture break even point, then it will not be wise for you to refinance your current mortgage loan.
  • However, if you plan on keeping your home for more than two years where you reach the break even point, then it will make sense for you to refinance your mortgage loan because anything past the 24 month mark is a savings of $200 per month.
  • A homeowner should not refinance their home loan more often than needed because every time they refinance, their start clock resets where it will be a new 30 year mortgage term unless the borrower chooses a 15 year fixed rate mortgage loan.

How To Get Ready To Refinance Your Home Loan

Refinancing your home loan should not be stressful if you get yourself prepared. Avoid Mistakes When Refinancing so your refinance mortgage process runs smoothly. Below are the bullet points on how to get you ready for refinancing your home mortgage and where you do not have to stress over your refinance mortgage process:

  • Common Mistakes When Refinancing to avoid is not shopping with various mortgage lenders. Getting along with your loan officer is one of the most important tasks.
  • Due your due diligence by checking out the mortgage lender, review their ratings and customer complaints, check the NMLS Consumer Access to see if there are any habitual regulatory violations, and shop for rates and fees.
  • Get a consumer copy of your credit report and make sure that there are no errors in your credit report.
  • One of the most common Mistakes When Refinancing to avoid is to make sure you have no credit disputes.
  • Non-medical credit disputes during the mortgage process is not allowed and will halt your mortgage process if the balance total is greater than $1,000.
  • Maximize your credit scores by paying down all of your revolving credit cards.
  • If you have lower credit scores, have your mortgage lender run your file through the FICO Analyzer where it will give you options on what you need to do to raise your credit scores.
  • If your credit scores are low because you have no credit tradelines, then consider getting two to three secured credit cards with at least a $500 credit limits.
  • If you have no revolving credit card accounts, each secured credit card can boost your credit scores by at least 20 or more FICO points.
  • Do not pay off any older collection accounts and/or charge off accounts until you have consulted with your loan officer.
  • Paying off an older collection account and/or charge off account can plummet your credit scores.
  • Determine how long you will stay on the home you are refinancing.
  • Ask your loan officer the best mortgage loan program for you.
  • Consider an adjustable rate mortgage versus a fixed rate mortgage loan if you intend on not keeping your home for more than 7 years.
  • Find out what your break even point is when you refinance.
  • For example, if you are saving $300 per month after your refinance and your closing costs and fees of your refinance is $3,600 that is added on the back of your mortgage loan balance, the break even point will be one year, $300 per month savings for 12 months is $3,600.
  • So if you plan on selling your home in less than a year of you refinancing, it will not be worth it because your break even point is one year.
  • After you recapture your loan costs which is after 12 months, you will be saving $300 per month so this makes sense.
  • By law, you need a net tangible benefit of 5% of reduction of your principal and interest in order to refinance.

If you are a homeowner who want to explore if refinancing your current home loan makes sense and will save you money, please contact Gustan Cho of The Gustan Cho Team at CrossCountry Mortgage at 262-878-1965 or email us at gcho@gustancho.com. You can text Gustan Cho on his cell for faster response at 262-716-8151. CrossCountry Mortgage NMLS 3029 is a national five star national Fannie, Freddie, and Ginnie Mae Direct lender licensed in 50 states and headquartered in Brecksville, Ohio known for no overlays on government and Conventional Loans and its 21 day closing business model. You can apply online at www.gustancho.com/apply-now . The Gustan Cho Team at CrossCountry Mortgage is available 7 days a week, evenings, weekends, and holidays to take your mortgage inquiry and issue pre-approvals.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

1 Comment

  1. I like what this article recommends about choosing your lender carefully. It makes sense that it could be good to make sure the lender you choose can work for your situation. It’s something to keep in mind because I’d definitely want a lender that can accommodate to multiple different financial scenarios.