|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
- 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:
Neither pre-qualified nor 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 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.
- 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
- 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.
- 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 .
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
Get a good-faith estimate of closing costs. See
item number four above.
- 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.
- 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.
- Do not sign your loan documents without reading them. See item
number nine above.
- 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
- 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
- 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.
- 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
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- 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.
- 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
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.
- 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
A good rule of thumb is to take out an equity loan when you need all the money up front
improvements, or debt consolidation. Take out an equity line if you need the money for a future event
like a childrens' college tuition.
- 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
- 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.
- Ask for a good-faith estimate of closing costs. See item
number four above.
- Do not assume that your home-equity loan is fully tax-deductible. There
some instances when your home-equity loan is NOT tax deductible. Your
mortgage lender is not a tax professional, consult your CPA.
- 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.
- Avoid getting home-equity line of credit if you plan to refinance
your first mortgage in the near future. See item 10 above.
- 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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