by Alden Smith
Everyone will agree – these are tough financial times. Although the government tells us we are not in a recession, all the indicators are there, and many financial analysts disagree with the government’s stance. In troubling economic times, one of the first things people tend to do is refinance their mortgage loans – whether to take cash out, or consolidate bills to help them deal with the higher cost of living. Here, we look at the mistakes people make when considering refinancing.
The Break Even Analysis
Before you consider a refinance, the first thing you have to do is a break even analysis. This is critical to determine whether a refi is right for you. First, you divide the transaction costs by your anticipated monthly savings to determine the number of months you'll have to stay in the loan to regain your refinancing costs. For sake of example, we’ll say your costs will be 2,500.00. You save $75.00 through the refi. Dividing the $2,500 by $75, it will take you a little over 33 months to earn back closing costs. You must then stay in your home that you have refinanced for 33 months to recoup your investment in the cost of the loan, or “break even.”
The Good Faith Estimate
When you apply for a loan, the bank or lender is required to give you a good faith estimate. This is required by law – the lender must give you the GFE in 3 working days after receiving your completed loan application. Read the GFE closely – if you see a lot of zeros in applicable fees, contact the lender and address them. Financial analysts say to never make your call on just one GFE – it is much better to do some loan shopping here to save on closing costs as much as possible.
Get The Rate Locked In
Many people overlook this factor. Because rates are changing so quickly these days, what looks like a good deal today might not look so good tomorrow. Always insure that the rate you are quoted is locked in, and get this in writing. It is also very important to know the length of the rate lock. This is subject to change, and may vary between different lenders. A rate lock commitment is your guarantee of interest rate and length of the rate lock. Get this in writing.
Document Signing
Always carefully read every document pertaining to your loan. Never sign them without fully understanding them. A common tactic of an unscrupulous lender is to hurry you through the document process, saying his secretary needs to make changes, etc, before you sign. Sign and read each individual document to avoid surprises at the closing table.
In Conclusion
A loan refinance is a big investment for the home owner. Always be careful when approaching a lender and be sure you know what you are getting into. Even though legislation is in the works for dealing with shady practices, this legislation will not go into effect until October 209.
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