How can I avoid making mistakes when I refinance or purchase a home ?

Buying a home | Refinancing your home | Getting a home-equity loan

Purchasing a home is the biggest investment you'll ever make. It can be a complex and overwhelming transaction. When purchasing your new home, the wise thing to do is to prepare as best you can. Doing your homework before you go out shopping could help you avoid making these mistakes.

Buying a home

  1. Get pre-approved! You'll have a better chance of getting your offer accepted by being as prepared as possible.

    Here are three levels of preparedness:

    bullet Neither pre-qualified nor pre-approved
    bullet Pre-qualified
    bullet Pre-approved

    Which buyer is more appealing to the seller?

     The buyer that is neither pre-qualified nor pre-approved

    This buyer is offering no evidence that they can afford to purchase the property.
    The Pre-qualified Buyer
    This buyer has met with a mortgage broker (or lender) and provided information regarding their credit, income, expenses, assets and liabilities. This buyer will be able to provide a letter from the broker stating an opinion of what the buyer can afford.
    The Pre-approved Buyer
    This buyer has provided written evidence of income, expenses, assets, liabilities and credit. All of their information has been verified by a lender, and most of the necessary paperwork for this buyer's loan has been completed, and their loan can close rather quickly. They will be able to provide a Pre-Approval letter from the lender.
     
  2. Do not make verbal agreements. Written contracts always override verbal agreements. Don't sign anything that conflicts with your agreement. Make sure that you understand the details of your agreement and that all details are in writing, and in your contract. Verbal agreements are not enforceable. 
     
  3. Do not choose a lender simply because of a low rate, or fees. If you choose your lender simply because they have the lowest rate, you may be disappointed. No one will deny that rate is important, and you need to consider the total cost of your loan, but looking only at rates and fees can mean that you miss other important factors of your loan. You should be confident that the lender you have chosen is reliable and will deliver the loan with the terms and costs they promised. Choosing the right lender can mean the difference between closing your loan on time, or losing your property because your lender didn't deliver.
     
  4. Ask for a Good Faith Estimate. Your lender is required by law to provide you with a written statement of the fees associated with your loan within three business of receiving your loan application. Review it carefully and ask questions about items you don't understand. Keep your Good Faith Estimate (GFE) and take it with you when you sign your loan documents. You should inquire about any fees that are substantially different from those contained in your GFE .
     
  5. Lock your Interest Rate. When your broker or lender tells you they have locked your rate, ask for it in writing, and make sure that the rate agrees with what you have been quoted.
     
  6. Avoid using a dual agent. Your interest will be different from the seller's. The Seller will want the best price, and all issues to lean in his favor. You want the lowest price, and all issues to lean in your favor. It is difficult for any Real Estate agent to properly represent both the Seller and the Buyer. Normally, the Seller pays the commission to the agent in a real estate transaction. You should keep that in mind if you consider a dual agent transaction. Buyers are better served by their own agent.
     
  7. Do not buy any home without professional inspections. The only exception to this rule might be if you are buying a new home with warranties on most equipment, and the construction. It is important that you get property, roof and termite inspections. Inspection reports can assist you in negotiating with the Seller for needed repairs. If the seller agrees to make repairs, make sure that the inspector verifies that the work is done prior to close of escrow. Know what you are buying.
     
  8. Shop for your homeowner's insurance before you are ready to close escrow. Don't wait until the loan process is finishing up before you shop for a homeowner's policy. If you wait until the last minute, you may pay a higher rate, and delay the closing process.
  9. Read what you are signing. Don't assume that your documents are correct. Look them over, ask questions if you don't understand, and be sure that you know what you are signing. If you can review your documents ahead of time, it will speed up the process of signing your documents at closing. 
     
  10. Expect the unexpected. Real estate transactions are detailed and complex. Sometimes details and complexities can mean unexpected delays. Don't panic if a last minute detail causes the process to slow down. If you chose a lender that you can trust, you can relax and let them take care of the issues. Give them a chance to do what they are best at, taking care of your loan transaction. 

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Refinancing your home
  1. Shop around before you refinance. Just because you already have a loan with your current lender does not mean that you have a shortcut to refinance or that you are automatically approved. You will have to provide documentation for approval, even if you choose to stay with your current lender. There are many lenders that may have better rates and terms than the one you are with now. Shop around and make sure that you are getting the best rate possible.
     
  2. Analyze the costs. Calculate your saving over the long term. There are many ways to make your mortgage investment work for you. Consider different programs, terms and other ways to invest your savings.
  3. Get a good-faith estimate of closing costs. See item number four above.

  4. Ask an appraiser to review the comparable value of your home. An appraisers comparison is typically done at no charge, but    can be invaluable when you are considering refinancing. Ii is designed to provide you with a range of possible values. Ask your mortgage company to provide "comps" for your property. A full appraisal can be expensive, and you want to be sure that you are not overestimating your home's value.
     
  5. Do not use the county tax-assessor's value as the market value of your home. The market-value of your home will be considerable different from your actual value.
     
  6. Do not sign your loan documents without reading them. See item number nine above.
     
  7. Send your documentation to your lender in a timely manner.  Many times the reason for delays in the mortgage loan process is due to the borrower not providing requested information in a timely manner. Although your mortgage professionals may try to gather all of the necessary documentation upfront, there are times when additional documentation is necessary. The faster you can provide this information, the sooner your loan can close.
     
  8. Get your rate lock in writing.  Once you lock in your rate, ask your lender for a written statement includes the interest rate, the length of the rate lock and details about the program.
     
  9. Avoid pulling cash out of your credit line before you refinance your first mortgage. This could result in a deal-breaker. Some lenders have seasoning requirements about taking cash-out for any reason other than home improvement. This can restrict your options. Wait until your refinance is completed before you pull cash-out.
     
  10. Avoid getting a second mortgage before you refinance your first mortgage. Most lenders will look at your combined loan to value when considering your loan application. this means that they will look at your first and second mortgages before you can get an approval. If you are thinking about refinancing your first loan, be sure to ask your mortgage lender whether it is a wise decision to take out a second before you refinance your first mortgage. 

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Getting a home-equity loan/line

  1. Look for a pre-payment penalty clause. Many loans that offer NO FEES have a pre-payment penalty attached to them. If you think that you will be refinancing or paying off this loan within the next 5 years, you may have to pay a penalty.
     
  2. Do not take out a larger credit line than you need. If you get too large a credit line, it can effect your ability to qualify for other loans. Lenders will consider your credit line when they are underwriting your loan, and possibly turn down your request based upon your available credit as well as credit used. Even if your equity line has a zero balance, having a large equity line available indicates the potential for a larger payment, which can make it difficult to qualify for other loans.
     
  3. Understand the difference between an equity loan and an equity line. Taking out an equity loan means that you get all your money up front and make fixed payments until it is paid if full. When you choose an equity line you can take out advances for various amounts. Most equity lines use a checkbook or a credit card to access your funds. You can only be charged interest on the outstanding principal balance on either equity loans, or equity lines of credit.

    A good rule of thumb is to take out an equity loan when you need all the money up front for home improvements, or debt consolidation. Take out an equity line if you need the money for a future event like a childrens' college tuition.
     
  4. Look carefully at the lifecap on your equity line.  Some credit lines have lifecaps of 18 percent. You might have to make payments at the highest potential rate.
     
  5. Shop around for a home-equity loan. There are numerous programs available for home equity loans and lines of credit, shop for the program that best fits your individual needs.
     
  6. Ask for a good-faith estimate of closing costs. See item number four above.
     
  7. Do not assume that your home-equity loan is fully tax-deductible. There are some instances when your home-equity loan is NOT tax deductible. Your mortgage lender is not a tax professional, consult your CPA.
     
  8. Do not assume that a home-equity loan is cheaper than using credit card.  Depending on your individual circumstances, a credit card can be cheaper than a home equity loan. Shop, compare, and do your homework.
     
  9. Avoid getting home-equity line of credit if you plan to refinance your first mortgage in the near future. See item 10 above.
     
  10. Avoid the trap of diving deeper into debt. If you are taking out a home equity loan or line of credit to pay off debt, be careful not to dive back in to debt after you pay off your credit cards, or other debts. Avoid the temptation of running up the balance on those credit cards again. 

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