4 Costly Mistakes to Avoid When Refinancing Your House

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A friend of mine just refinanced his house. And he's not happy.

You'd think that someone who lowered his interest rate by more than 1.5 percentage points and dropped his loan term to 15 from 30 years with a fixed-rate mortgage would be ecstatic. But he's not. In fact, he feels like he got a raw deal. But they were self-inflicted wounds; he made some classic mistakes when refinancing his house, and it cost him a lot of money in the end.

Here are some of his missteps, and what we can learn from them:

1. Not Shopping Around for the Best Quote

The biggest mistake that most mortgage applicants make is not shopping around for multiple quotes. My friend simply applied to one mortgage company without checking around to see if he could find a better deal.

That locked him into a bad deal he later regretted. You have to shop around to not only get the best interest rate but also the best terms for your loan, whether you're applying for a traditional mortgage or refinancing.

My friend's error here stemmed from a misunderstanding about how credit agencies operate: He thought that shopping around with multiple mortgage companies would harm his credit score. What he didn't realize was that credit bureaus like the Fair Isaac Corp. (FICO), the creators of the popular FICO credit score, understand that consumers will -- and should -- shop around.

A "hard pull" of your credit score for a new mortgage application and taking on new debt will slightly lower your credit score. But FICO treats it as only one pull of your credit score if you shop around and apply and receive multiple bids for the same loan in a short time period.

2. Accepting a Long Escrow with a Non-Adjustable Rate

When my wife and I closed on our first home, our mortgage lender offered us a one-time deal to change our rate if the available interest rate for our loan decreased. Banks peg mortgage rates against many factors, such as the LIBOR rate, supply and demand, and other factors, and they fluctuate constantly.

The mortgage company originally required my friend to pay a point on top of his closing costs for his refi. While he was waiting for the approval process to play out, the market shifted. Now his bank offers customers the same refinance mortgage for better terms and no points paid up front.

But the mortgage company wouldn't let him change his refinance application. He's locked into the contract with the less beneficial rate. If he had shopped around and not settled for the first loan offer that was made to him, he could've probably gotten one with a clause allowing him some wiggle room to change if the rates moved before he closed.

Now he's stuck with a less than optimal loan. The difference will cost him more than $1,000 in fees.

3. Settling for the Lender's Appraiser

My friend also used the lender's in-house appraiser -- a mistake.

You should have the option to choose your own appraiser, real estate attorney, survey company, and other professionals to help you close on your home. My friend used the lender's attorney for closing, as well. This is a big red flag.

Don't settle for the people your lender chooses to help you; it's a conflict of interest. No one should care more about your money than you do.

4. Not Understanding His Rights to Rescind a Mortgage

Most states have a lemon law clause when you buy a car. You can return it and walk away from the deal within the first three days if you're not happy. Refinanced mortgages often have a return policy, as well, if the borrower has second thoughts. Consumers have rights under the Truth In Lending Act (TILA), which allows them to rescind a mortgage deal under certain circumstances.

As with cars, borrowers refinancing their mortgages have the right to void a deal within three days of their closing if they meet certain conditions. It must be a refinanced mortgage. And you can't be refinancing with your current mortgage company.

Rescinding a refinanced mortgage might be the nuclear bomb reaction to a mortgage gone badly before closing. Borrowers should use it as a last resort. Consumers can prevent falling into a bad refinance deal, which is easier than getting out of one after signing on the dotted line.

Have you ever refinanced your home? Did you shop around for the best deal or take the first one your bank offered to you?

Hank Coleman is a financial planner and the publisher of the popular personal finance blog Money Q&A, where he answers readers' tough money questions. Follow him on Twitter @MoneyQandA

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11 Comments

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jpfmtka

In my opinion, the NUMBER ONE mistake is pulling cash out of your home. Curiously, the author seems to have overlooked this mistake. And, before many or some of you get excited and start pounding your keyboards pointing fingers and blaming the current administration for their financial woes, believe it or not there are some of us with substantial equity in our homes.

July 24 2014 at 12:42 PM Report abuse +1 rate up rate down Reply
trig1957

The 5th costly mistake is taking this article too seriously. Too bad these things aren't fact-checked. Supply and demand? Choose your own appraiser? This piece is rife with errors.

May 07 2014 at 10:50 AM Report abuse +1 rate up rate down Reply
loansumlou

This guy lost all creditbility when he said you should have the option of choosing your appraiser. You cannot ever choose your appraiser. Period. You can thank DODD / FRANK and the HVCC rule for that one.

Also, regarding number 2 .... if rates dropped and the lender refused to lower the rate.....MOVE YOUR LOAN! Many times if the appraisal has already been done there is a good chance that the new lender may be able to use it. If not, see if they are willing to reimburse you at closing for a new appraisal.

Listen folks I've been in the real estate, building and mortgage industry for over 30 years and there are always good and bad Realtors or Loan Officers. There are also good and bad Doctors, Lawyers, Senators, Presidents and even writers!

My advice, for what it's worth, get a personal referral from someone who has had dealings with that particular person in any industry. It is usually your best resource.

February 04 2014 at 11:42 AM Report abuse rate up rate down Reply
Alex Denton

One tactic lenders like to use is tell the consumer how the rates are "standardized" across the industry so I won't find a much better deal by shopping around. I have heard this line over and over from different lenders on different loans I was attempting to get. These companies are not really able to compete and try to convince consumers to not shop around.

I refinanced my primary residence last year and most banks were offering 3.125% and the big boys like chase were at 3.5%! I did a nationwide search and found a few reputable medium sized lenders and the one I went with offered me a rate of 2.375% (no points)! Of course when I called the other lenders they all said "oooohhh that cant be right, they must be an illegitimate company, its impossible for them to offer a rate that low etc. Of course when I gave them the name and information on the company, they kind of went silent realizing their "standardized rate" line didn't work on me. Point is although the part of getting your own appraiser is not really possible these days, shopping around will usually save you tons of money.

February 03 2014 at 6:57 PM Report abuse +1 rate up rate down Reply
kentwoodtjt

Wow, whoever wrote this article knows a little bit but not a whole lot,, I bet in todays world consumers would love to choose who appraises their house, this was just one part of the mortgage collapse, consumers do not have the choice in who appraises their home, no if ands or buts about it, so Hank before you start running articles make sure you have all the facts, and Im sure you are probably a stuffy white shirt that has never originated a loan in your life, if you have, you would have known this, if you want help on the updated laws just shoot me an email and I will enlighten you a little bit.

February 03 2014 at 1:00 PM Report abuse rate up rate down Reply
Ronnie

LAST COMMENT. If your bank lowered your rate for free, they did not give you the lowest rate, they built the costs into the RATE. it is called REBATE. No one works for free, so believe me, it the bank streamlined your loan, they did it at a higher than par rate. We can do almost any loan for free if it is big enough. No one does a free loan, not even FHA or VA. , so before you blame the banks, do your research. Banks are not charities, just look at the buildings and read the news. They make money after you pay, it is called servicing, and it is built into the deal.

February 03 2014 at 10:04 AM Report abuse +1 rate up rate down Reply
Ronnie

The banks want to keep you as a customer. If you go somewhere else, they lose your servicing, so saying that your bank will not lower your rate is flawed. The bank services the loan, they do not have a pile of money. FNMA, FHLMC, FHA and VA are the investors, not your bank. You just have to reprocess, and pay for the services again. If you don't like the meal, then walk out of the restaurant, if you eat the meal, you have to pay for it. That is why the fees are charged again. Title., processing, underwriting, appraisals, recording fees, credit reports, flood certs all cost money. Competiion is tough, so get over it. either pay for it, or keep what you have.

February 03 2014 at 10:00 AM Report abuse +1 rate up rate down Reply
Ronnie

I am a Loan Officer with a major lender, and have been in the industry for 28+ years. Your comments above have several flaws. There is a law against choosing your own appraiser, because in the past, using your own appraiser caused lenders to accept the buyer's opinion, talk about a conflict of interest. We now have NO contact at all, and no influence over the opinion of the value. If you want to contest the value, you , as the homeowner have the right to provide your opinion. It rarely works, because a house sold 2 years ago cannot be used to compare to recent sales, just because you think your home is worth more.

February 03 2014 at 9:55 AM Report abuse +2 rate up rate down Reply
pfjw

Mpffff... Funny thing, our bank came to us with a very good rate - so as to preempt us from going elsewhere. But the advice is generally good. One needs to keep in mind that the bank is a store where their *Customers* are shopping for a mortgage. They are beholden to their customers, not the other way around.

We went from 20 years @ 4% to 15 years at 2.75% fixed. No points, no closing costs, no wrap-around costs. They accepted the previous appraisal, no muss, no fuss. Our monthly payment went up by about $95, but our term dropped by 4 years.

February 03 2014 at 8:06 AM Report abuse +1 rate up rate down Reply
RICH

Had a 5.25% loan with Chase, always paid on time, 800+ credit score; when rates dropped I asked them to cut me a better deal. They wouldn't consider it. Re-fied with USAA, all good. Then rates dropped again, asked USAA to cut me a better deal, nooooo. So I re-fied with 5/3, now at 3% no closing costs, no points, even got cash out to pay off a really steep (6.5%) commercial loan. Really pays to shop around. Yes, it is a pain to fill out all the blinking paper work but you'll get over it in 15 or 30 years of lower rates.

February 02 2014 at 11:52 AM Report abuse -1 rate up rate down Reply