How to Avoid Mortgage Refinancing Trouble
Despite low interest rates and plenty of competition among lenders, many borrowers hoping to mortgage refinance are running into trouble with new loans.
Here’s why.
- Problem: Hidden charge
No doubt closing costs won’t be a surprise if you already have a mortgage; fees for application, credit check, title policy, flood certification (if necessary) and the bank attorney can easily exceed $2,000.
Overall, mortgage origination fees average 1.7% of the loan balance, with third-party fees adding another 1.1%, according to the Department of Housing and Urban Development.
But watch out for this zinger: the prepayment penalty. Many people who took out loans in the past few years are on the hook for anywhere from 1% to 3% of the loan value when they refinance, says Bob Moulton, president of Americana Mortgage Group in Manhasset, N.Y.
What to do: Total up all the fees for a new loan, and you can see how the bill might wipe out the savings you get from a lower rate. Use a mortgage calculator to determine if you’ll come out ahead. If you won’t, you may have to wait a year or two for your prepayment penalty to expire.
- Problem: Shrinking equity
With every refinancing comes a new appraisal. If you live in a market where home prices are off sharply, you may find that your house appraises for less than you expected. Worse, you could find yourself owing more than your house is worth.
What to do: John Bredemeyer, an appraiser and spokesman for the Appraisal Institute, suggests inspecting the bank’s appraisal carefully. Does it correctly describe your property? Bear in mind, some appraisers conduct inspections from the street, making it hard for them to see upgrades like a new kitchen or finished basement that have raised the value of your home.
- Problem: Steeper rates
Lenders, now trying to steer clear of losses after a wave of bad credit mortgage defaults, have tightened credit standards for all borrowers.
Moreover, notes mortgage broker Melissa Cohn of Manhattan Mortgage Co., banks have tacked on another eighth to a quarter of a percent to already rising mortgage rates to cover their risks.
What to do: Find out what rate you qualify for before you apply for a home mortgage loan. First buy your credit score from all three major bureaus for $15.95 at myfico.com. Then use the tool on the home page labeled “The higher your FICO score, the lower your payments” to see what rate someone with your credit score would likely pay and what your monthly payment would be.
If the number is high, make sure your credit report doesn’t contain errors that are dragging down your score. Chipping away at your credit card debts will also help you refinance profitably.
SOURCE: Money Magazine