Refinancing Mistakes to Avoid

There are lots of facts to focus on when you’re shopping for a mortgage refinance. If you overlook some key points, though, you may be making the same mistakes as many mortgage shoppers before you. You can avoid getting caught in traps now that could have negative consequences later by knowing what these potential pitfalls are and avoiding them.

Control your cash-out

In the recent past, the cash-out mortgage refinance, where homeowners borrowed extra money when they did a mortgage refinance, was all the rage. Unfortunately, that type of borrowing got many people into serious financial trouble when housing values dropped, and they found themselves underwater on their mortgages. If you want to pull additional cash out of your equity when you refinance, opt for a fixed-rate mortgage. Then you’ll have confidence that you’ll be able to pay it back.

Lock in your rate – on paper

Mae West once quipped, “An ounce of performance is worth pounds of promises.” Your lender may promise you a low rate, but unless it’s in writing, it won’t be worth an ounce. Once you agree on a mortgage rate, make sure that your lender gives you a written statement. It should also include information about how long the lock is good for, and additional details about the loan that you’ve agreed to.

Know your break-even period

If you’re going to refinance, it’s going to cost you. It may feel like first mortgage déjà vu, because you’ll be required to pay closing costs again, including fees for appraisals, credit checks, title insurance, application, and points, to name a few. Once you know how much it’s going to cost, you can figure out how long it will take to recoup those fees before you start seeing refinancing benefits. If you’re not planning to stay in the house long enough for the refinancing perks to pay off, it’s not worth the expense.

Appraisal shock

The ultimate determination of whether you’ll qualify for a mortgage refinance or not will depend partly on your appraisal, especially if you’re in an area where real estate values have dropped. Prepare yourself by checking with a local realtor, and asking for a list of recent properties that have sold that are comparable to yours. This will give you some idea of how much your home is currently worth. Before the appraiser comes, fix any obvious problems that may be an eyesore, like broken windows or messy landscaping. Also, don’t use the “assessed value” to guess where your appraisal may come in. That number is determined by the county tax assessor and could be lower or higher than the current market price of your property.

As the old saying goes, “Fool me once, shame on you…fool me twice, shame on me.” The above traps have fooled many borrowers. Now that you know them, you can easily avoid them, and your mortgage refinance will definitely give you the benefits that led you to do it in the first place.