Common Homeowner Refinancing Mistakes

The most common homeowner refinancing mistakes turn an otherwise simple process into a stressful experience. One very typical misnomer consumers believe is a refinance is a modification of their current home loan — it isn’t. Refinancing is obtaining an entirely new mortgage and there are several types of home loans. What does differ is there is generally collateral equity and a demonstrable mortgage payment history. However, there are common homeowner refinancing problems which can delay or even cause the loan to be denied altogether.

Common Homeowner Refinancing Mistakes

Right now is an ideal time to refinance as the Wall Street Journal reports home prices across the country continue a trend in gains. In addition, interest rates remain at near an all-time low. A 30-year fixed rate currently stands at 3.42 percent, a 15-year fixed rate note at 2.76 percent, and a FHA 30-year at 3.25, according to Mortgage News Daily. However, interest rates are not expected to stay this low.

“Refinancing isn’t a guaranteed deal. You’ll need to qualify for the loan in almost the same way you did for your first mortgage—that means paperwork involving things such as income verification and employment history. If you’re not prepared, your application could be rejected.” —

Recently, Federal Reserve Chair Janet Yellen explained in a monetary policy speech, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” With such factors in-play, refinancing is a great advantage option to save thousands of dollars over the life of the loan. But consumers should know common homeowner refinancing mistakes before they apply for a new mortgage to replace their existing home loans:

  • Not knowing what’s in your credit files. When you apply for a mortgage, your credit reports will be instrumental to lenders. Remember, refinancing isn’t a modification of your current mortgage, it’s an entirely new home loan. So, pull your credit files from all three reporting bureaus and pursue each carefully. Be sure to dispute errant information via snail mail instead of using the online forms (these are purposely too short). Follow-up thereafter to ensure all disputes are resolved.
  • Opening new credit lines before closing. It’s very tempting to make purchases when refinancing. After all, you’re saving more money every month and a new set of living room furniture is long overdue. But opening new lines of credit will seriously impact your debt-to-income ratio or DTI and that can cause a refinance loan to be delayed or denied by a lender.
  • Having too much debt obligations. It’s not just new lines of credit which are harmful to the prospects of refinancing. In addition, if you already have a lot of debt obligations, your debt-to-income ratio or DTI will reveal this. A debt-to-income ratio of less than 43 percent is ideal to banks and mortgage lenders.
  • Failure to shop for the best product. Another bit of important due diligence is to shop for the best home loan. Don’t just go to your current bank or mortgage lender believing you’ll get the best product. Take time to compare products based on interest rates, term, and other important factors.
  • Forgetting to factor-in all applicable costs. While you won’t have to pay for a home inspection and other upfront costs associated with a new home purchase, you’ll still have to pay closing costs. If your existing lender offers a no closing costs option, learn if these are just incorporated into the new loan.

In addition to these, a new problem is emerging, which makes obtaining a refinance more difficult — rental income from sources such as Airbnb. In the past, lenders simply considered the property itself as a primary residence or an income rental property. Now, if you are hosting paying guests, it’s more difficult to refinance. So, it’s important to disclose this early when you are refinancing your home.