With interest rates near historic lows, it's definitely a smart time to consider refinancing your home. But be careful - it's easy to make a mistake that could end up costing you a lot of money, or even wrecking your refinance all together.
"Getting a loan these days isn't easy," says Bill Rayman, a mortgage consultant with Mortgage Capital. "Anything you might do that makes the process harder or less likely to go through smoothly can be a big mistake."
So what are some things that might delay or jeopardize your refinance? Take a moment to look over these mistakes - and learn how you can avoid them.
Mistake #1 - Providing the wrong bank account information
Providing bank statements for a refinance is typical. But if you're planning to use money from an account other than the ones you provided statements for, you could find yourself delaying the loan.
"This is a mistake that often comes up during a loan process," Rayman says. "I've had clients give me checking and savings account information indicating they have the money to close their refinance. But when we get to escrow, they bring the money from a money market account."
The problem with this, says Rayman, is that "Even though it's theirs and it's okay to use the account, because they didn't provide that account's statements in advance the lender has to go back to underwriting to get the funds approved."
As a result, "You could lose a couple of days to a couple of weeks on this," Rayman says. "Everything gets redrawn, and your lock on the rate could expire - meaning you lose the loan."
What you should do instead: "Full disclosure," Rayman says. "Tell us what you've got. Or, if you just want to use the checking and savings, that's fine - but then you can only use those accounts when it comes time to close."
Mistake #2 - Not telling your broker about a divorce or second home
Refinancing is a big deal, with big money on the line - you know that. But did you know that all sorts of information - not just financial information - goes into calculating the terms of your loan?
So if, for example, you fail to tell your broker about your divorce, your second home in another state, or a variety of other things, you could be jeopardizing your refinance, or even committing mortgage fraud, says Rayman.
"Let's say someone's getting divorced," Rayman says. "Maybe they're embarrassed by the truth, or maybe they don't think it matters - so they don't disclose it." However, this is critical information that could affect one's finances and thus, lenders need to be aware of this change.
Because lenders base their calculations on the information you provide, if any of it turns out to be false or not-the-whole-truth, your chance of getting a loan can plummet, adds Rayman.
What you should do instead: Tell your broker everything. "Think of your mortgage broker like your doctor or your lawyer or your CPA," says Rayman. "They'll see all your tax returns and financials. You ought to come clean with them up front. They need to know everything to do their job. Honesty is the best policy."
Mistake #3 - You assume your estimate is the actual rate you're going to get
Have you heard the old saying, "It's not over 'til the fat lady sings"? Well, when it comes to refinancing, it's not over until you have a rate-lock - which means that you and the lender have agreed on what interest rate you'll be paying on your new loan.
"I hear this often - someone gets a broker or bank to give them a certain rate and a good faith estimate that spells out the terms," says Rayman. "What they fail to recognize is that it's just an estimate - it doesn't guarantee anything. Some people get sucked into that and think they have a deal, then they get to the end and the broker says, 'Oh, the rates went up since we started this process so I have to charge another point now.' Until you lock something in, these numbers are subject to change."
What you should do instead: "Read and go over all the disclosures with your broker," Rayman advises. "Some of it is confusing, particularly the numbers. You need to make sure you understand up front how it works, because you can't change it at the end of the process."
Mistake #4 - You make an expensive purchase before your loan closes
Refinancing can be a long process - anywhere from two weeks to two months. Waiting for your loan to close can be difficult, but what can be even harder is refraining from making any big purchases before your loan closes.
Yes, even if you find a great deal on that new car you want, if you want your refinance to go through, you need to exercise patience.
"If you're in the middle of a refinance and you go car shopping - even if you don't sign a contract - it will show up as an inquiry on your report," says Rayman. "If your lender sees an inquiry from, say, BMW, it will stop the process. They'll see you're shopping for a car and will include it in your debt-to-income ratio."
This is important to keep in mind because lenders use your debt-to-income ratio to determine how much to lend you. If your debt goes too high, from say, a new car purchase, lenders might be afraid you won't be able to make their monthly payment and they could refuse to do the loan, says Rayman.
What you should do instead: "Just wait," Rayman advises. If you hold the process of making any big purchases until your refinance closes, there's less of a chance your lender will start to wonder if you can make your mortgage payment, he adds.