Homeowner refinancing mistakes are actually quite common because it’s usually an unfamiliar process. While you certainly know the term, it’s quite likely what you think it is and what it actually is are two different things. That’s okay, the truth is most consumers aren’t in-the-know when it comes to refinancing. So, it’s important to know about the biggest pitfalls to avoid a bad experience. After all, when you make such a big move, it’s helpful to understand what’s involved and not be under false impressions.
What Home Refinancing Is and What it Isn’t
Perhaps the most widespread misnomer about refinancing is that it’s some type of extension or modification of an existing mortgage. It isn’t. Refinancing is actually obtaining an entirely new home loan. You’re not redoing or changing your current mortgage. Instead, you’re applying for a new debt instrument and going through almost the same process you would if you were buying a resale or new construction.
“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.” —Realtor.com
In fact, there are few differences between the two scenarios. For instance, you won’t likely need a home inspection, pest inspection, or even a wind mitigation inspection. Although, this isn’t always the case. Some lenders might ask for certain things that are more commonly associated with purchasing a resale or new construction. So, you should be prepared for such situations.
Top Homeowner Refinancing Mistakes to Avoid
Right now is a good time to refinance as interest rates remain low but are indeed incrementally rising. So, if you’re thinking about refinancing, you should take action soon but make sure it’s the right move. Do your homework and calculate the overall cost and compare it to the time you’ll stay in the house. Generally, if you’re going to stay in the home for four to five years or more, it’s probably worth the cost. But, if you might sell in the next two to three years, it’s unlikely refinancing is a good move. If refinancing does work out with your budget, be sure to avoid these common refinancing mistakes:
- Not being aware of your credit history. Take the time to get copies of your credit files from all three bureaus. (You can do this for free, once a year, at Annual Credit Report.com.) Credit files are notorious for containing inaccuracies and you should dispute them through snail mail.
- Opening up new lines of credit. When you apply to refinance, you are applying for a new mortgage. Which means, opening new lines of credit will cause problems and might even lead to a denial. If you get a new credit card or finance furniture or a car, you immediately change your debt-to-income ratio, which is a bad thing.
- Having too much consumer debt. Speaking of the debt-to-income ratio or DTI, if it’s over 43 percent, lenders won’t likely approve a refinance. It’s simply just too much debt and presents too large a risk for banks and credit unions.
- Failure to shop around. A huge mistake homeowners make is to go with a “known” quantity. Which is to say, going directly to your current mortgage lender for a refinance.
But, this is an error because you may not get the best deal possible.
If you’re on the fence between selling and refinancing, please don’t hesitate to phone me at 407-616-7286, I’ll be happy to speak with you.