Before You Refi or Get a Home Equity Loan - Do You Know These 50 Things?
1. Your home is the collateral for the loan - If you are unable to make the monthly loan payments, you could be in danger of losing your house.
2. Not all loan repayment schedules are arranged to pay off the loan by the end of the term - Many arrangements leave the borrower with thousands of dollars left on the loan, which must be repaid in a lump sum or refinanced again into a new mortgage loan.
3. You have 3 days to change your mind - When your house is collateral for a refinancing loan, federal regulations give you three days to cancel the loan for any reason. The mortgage lender is required to provide you with a form to be used for this purpose, but even if they don’t you can still cancel within the three days with a written letter.
4. Most home equity loans are adjustable-rate products, so be aware of the fact that monthly payments can increase over time - This factor surprises and hurts many homeowners later. Make sure before you commit that you can afford to pay much more than the original payment you are getting.
5. Home equity loans and lines of credit do not have the same fees and closing costs as a refinance loan - Become familiar with the different options from your lender.
6. Not all refinance loans will save you money, so be sure you crunch the numbers - Add the interest costs and payments for the rest of your current mortgage term and compare them to the interest costs of the proposed refinance loan. Make sure there is a worthwhile savings. Know your break-even point for a refinance. Calculate how many months it will take to pay off the additional costs and fees associated with obtaining a refinance loan, and determine if those costs are worth the effort in the long run.
7. Too much shopping can hurt your credit score - Remember that each time a mortgage lender queries your credit report a notation is made. Too many inquiries in a short period of time can lower your score.
8. Make sure your intentions are worthwhile - Analyze your reasons for considering a home equity loan or refinance loan and make sure that you’re doing it for the right reasons. Every time you refinance or get a home equity loan it costs money. Make sure that overall you will be saving money or doing something in the long run that will help you, not hurt you. Refinancing or getting a home equity loan to buy a luxury car or other frivolous items is not wise. If you’ve decided to get a loan because your income just isn’t enough to cover your bills, then an equity loan is a mistake. In that situation it will only delay the inevitable, and when the loan proceeds are gone you’ll find yourself in even more trouble.
9. Home equity loans have the potential to leave the borrower “upside down” on the loan - If you borrow all of the equity in your home, and experience declining real estate values, your home may not be worth enough to cover the outstanding balance on the loans. You would then be responsible for the remaining debt.
10. You may end up paying more money in the long run if you’re not careful when choosing the loan terms for a refinance - Depending on your current interest rate, how far you are into the original mortgage, and the interest rate of the new refinance loan, your total payments could result in more overall interest payments that if you had simply stayed with the initial mortgage.
11. Different lenders will offer different repayment terms, so compare terms and consider your ability to repay - Shorter terms will come with higher payments. Choose a repayment schedule that fits your allocated budget.
12. Home equity & refinance loans are usually easier to get than first mortgages - Because you already own the home, and the home is serving as collateral for a new loan, there are far fewer complications.
13. Your credit score will have a direct impact on the quality of your new loan, just as it effected your first mortgage - Evaluate your credit before applying for any new loans. Refinance and Home Equity Loans weigh heavily on your recent payment history, especially how you have paid on your current mortgage.
14. Every lender will have different fees associated with a refinance or home equity loan - Interest rates are not the only variable to compare with different lenders. The only way to adequately evaluate different lenders is to compare their fees side by side. Most companies have programs that are nearly identical as far as interest rates and loan terms, but fees vary widely from one company to another.
15. Do not try to hide the financial troubles in your past - If you neglect to provide accurate financial information to a potential lender, you run the risk of receiving a much higher interest rate if they find it on their own. By being up front about your history, the lender places added trust in you as a borrower, however if they find out you “forgot” some things about your past they may question the validity of the rest of your application.
16. Ensuring the accuracy of the information on a loan application is the responsibility of the borrower - Do not sign an incomplete application and do not allow your loan broker to fill in the gaps later. Too many loan officers will exaggerate of misstate information in hopes of getting a faster loan approval.
17. Home equity loan interest is not always tax deductible - There are numerous factors that your accountant will need to evaluate before determining whether or not your interest can be deducted on your federal or state income taxes.
18. Existing home equity loans can be consolidated with the initial mortgage loan into one larger loan - When evaluating this option, be sure that your current home equity loan does not contain any pre-payment penalties.
19. Beware of loans with “padded” fees - These are additional fees that mortgage lenders add on to the closing costs of the loan. There are countless lists of ridiculous fees that actually mean nothing. Be sure to ask your lender to explain in detail all of the extra fees they plan to charge, and don’t hesitate to dispute the validity of the ridiculous ones.
20. If you use a mortgage broker, you will be paying for their services regardless of whether or not they do a good job - The mortgage broker’s job is to find you the best loan and work with you every step of the way, but not every broker will work hard to get you the best possible loan terms. Make sure you find a reputable broker who will continuously search for better deals, as well as one willing to help you communicate with the lender.
21. Some refinance and home equity loans contain “teaser” interest rates - These are rates that start out very low but continually increase over time. Generally, this fact is not appropriately disclosed or explained to the borrower, and there can be problems when monthly payment invoices start to increase after some time. Be sure to get exact specifics from the lender about the details of the interest rates.
22. Many finance companies will try to coerce you into purchasing additional unnecessary or inappropriate insurance products - Be wary of lenders who tell you that credit insurance or similar protection products are a requirement of the loan. Products like these are often beneficial, but should be added at the discretion of the borrower and not as a mandatory addition.
23. Do not make large purchases or take on additional debts during the application phase of your refinance or home equity loan process - The added debt on your credit report could adversely effect the terms and/or approval of your loan.
24. Be careful when moving large sums of money into and/or out of your bank accounts immediately before or during the application stage of your loan - Since your assets and bank accounts are often evaluated by lenders when underwriting your loan, any noticeable changes in status could delay closing or require further explanation and investigation by the lenders.
25. Do not sign any documents or paperwork without reading them in full - Too many people find themselves in situations they are not prepared for because they signed something that was not adequately explained or disclosed. Even though you will sign significant documents, take your time and do not let lenders or brokers pressure you into signing without reading. It’s also a great idea to always have your attorney review all documents and explain them to you in detail. The money you pay an attorney could save you a hundred times more later on.
26. Do not choose a lender just because they have the lowest interest rate you could find - Most lenders will quote loan payments without disclosing all of the additional fees and discount points they’d be adding into your costs. Without a clear breakdown of these fees, it is impossible to appropriately compare multiple offers.
27. Be aware that lenders will pull another copy of your credit report the day before closing - Just because your loan has been approved and cleared to go to closing, it is not entirely set until all documents are signed. Many lenders will attempt to alter the terms of the loan at the last minute if they find “questionable” items on your credit report just prior to closing, and their intention is to improve their situation or justify interest rate increases because they believe you’ll be more agreeable under time pressure.
28. Lenders usually want to see six months of loan payments in cash reserves before they will consider approving the loan - Do not spend too much of your savings until after the loan has closed.
29. Avoid using the equity in your home to purchase assets that will decrease in value - Or assets that are worthless to begin with. A car is the perfect example of what NOT to buy with your equity, since it immediately decreases in value. This will do nothing to improve your financial situation in the future or increase your ability to repay the loan. Other examples of things to avoid are clothes, vacations, parties, and generic monthly bills.
30. Lenders have the ability to revoke a home equity line of credit if they determine that your risk to them has increased beyond an appropriate level - If you fail to make payments on time, or if their periodic credit inquiry reveals something they’re uncomfortable with, then they reserve the right to restrict access to the balance of your equity credit line.
31. Consider a professional evaluation of your overall financial situation prior to, or immediately following, a mortgage refinance or equity loan - A professional financial planner will be able to explain the potential liabilities that exist with such loans, as well as how adequately your income and assets are protected from catastrophes.
32. Nothing is free - Many banks and lenders will offer “free” refinance or home equity loans. Even though the closing costs are waived, you must analyze whether or not the increase in monthly payments is acceptable over the life of the loan.
33. Carefully evaluate the length of the proposed refinance loan - If you’re already well into the duration of your initial mortgage, and then you refinance for another 30 years, you will most likely end up paying more money as interest (depending of course on your current rate and the proposed rate of the refinance loan). You’ll experience the best savings if you refinance into a loan with a shorter term than what’s left on your initial mortgage.
34. Think twice about applying for a home equity loan that is higher than the actual equity value in the property - Lenders usually refer to this as a “High LTV Loan”. This type of loan creates a more significant risk to the borrower because if the property value has not increased enough to cover the additional principal of the loan, then the borrower will be forced to find other means of repaying the debt.
35. You have the ability to negotiate your loan terms and interest rate - Keep in mind that there are many mortgage lenders competing for your business and many of them are willing to consider your requests for better terms or lower interest rates. If they know (or believe) you’ve got a more competitive offer somewhere else, they should be much easier to deal with.
36. Consider how long you plan to stay in the home before applying for a second mortgage or refinancing, because your intentions should determine the type of loan you want - If you’re not planning on staying in the home for more than a few years, you should consider an adjustable rate loan. This allows you to take advantage of the lower payments for the first several years, and hopefully you’ll be out of the house before you’ve reached the first increase in interest rate. If you plan on staying in the house for quite awhile, then a fixed rate mortgage is probably better because it’s predictable and you’ll be better able to plan around the payment.
37. Keep in mind that even though a shorter-term loan will usually have a much higher monthly repayment amount, you will actually pay less in interest expenses because more of your payment is going toward the principal - Plus, with a short-term loan there is less likelihood that you will experience dramatic shifts in interest rates as you could with a longer-term loan arrangement.
38. Avoid entering into a Negative Amortization refinance loan - This is a concept proposed by countless lenders that sounds good on the surface but carries very significant risks. The idea is that you get an interest-only adjustable rate mortgage and pay only the interest, while setting aside the remainder of the standard monthly payment into an interest-bearing savings account. With Negative Amortization, the loan payment does not have to be high enough to cover the interest expenses, so any unpaid interest is added to the principal balance. The concept is that the compounding interest in the savings account will outweigh the cost of the additional principal. This is untrue because once the unpaid interest is turned into added principal, you will owe more interest on the total loan amount (as if you borrowed that much more in the beginning).
39. A home equity loan or mortgage refinance will usually increase your appropriate life insurance coverage amount - Consider whether or not your family will be able to continue making the additional monthly payments in the event that you die before the loan is repaid. Life insurance can be a cost-effective and attractive method of ensuring that the loan will be paid off, leaving your family in a much better financial situation.
40. Consider the tax implications of your uses for an equity loan or line of credit - Although there is no income tax due on the amount of money you borrowed from your home, there will definitely be taxes due on any additional money earned through investments you may purchase with your equity money. For example, if you borrowed $10,000 of your home’s equity and invested it into a brokerage account that grew to $12,500 over the course of the year, then you would owe tax on the earned interest of $2,500.00.
41. Make sure you understand the difference between the “payment rate” and the “interest rate” on your loan - Many lenders will constantly refer to the “payment” rate during conversations and discussions to distract you from unattractive interest rates.
42. Understand that if you refinance your home for more than 80% of its value, you will have less than the required 20% equity to avoid PMI - Most lenders will require PMI to be added into the cost of your new loan. This is often a surprise for borrowers who have never paid PMI, or have previously reached the 20% equity mark and removed the PMI.
43. Do not consider the county tax assessor’s determination of your home’s value as a basis for how much equity you have in your home - Mortgage companies do not even look twice at the tax assessor’s appraisal because it is usually very different than the market value.
44. Consider your ability to continue repayment of the home equity loan or second mortgage in the event of your disability - Should you become unable to earn an income due to disability, they you jeopardize your family’s lifestyle. Ask your financial planner to evaluate your current disability insurance benefits and recommend any alterations or implementation of a new program.
45. Only borrowers with great credit are likely to be approved for a home equity loan that is higher than the actual equity in the property - Many lenders offer home equity loans that are up to 125% of the equity value, but since that additional 25% is an unsecured loan the lender is taking a significant risk.
46. Home equity and refinance loans obtained in the Fall and Winter months usually have lower interest rates and lower fees than those loans obtained in the Spring and Summer months - If you apply for a loan in the Spring or Summer, double check to make sure the fees are not significantly inflated over other seasons.
47. The lender is required by law to provide the borrower with a Good Faith Estimate (GFE) of closing costs and a Truth In Lending (TIL) statement within three business days of having received an initial application - Hold your lender to this. It’s important that you review this and give yourself plenty of time to understand all the fees.
48. Familiarize yourself with the various types of loans available for refinancing - Each loan has its own pros and cons, so by knowing the basic features of each type you’ll be better prepared to have an educated conversation with your broker. This will also prevent you from becoming the victim of an unscrupulous broker.
49. Insist that the interest rate quoted to you by the refinancing lender is provided to you in writing as soon as possible so you may use that information as a basis for further investigation and comparison - The lender’s letter should include the interest rate, the period of the rate lock, and all other significant aspects of the loan program.
50. Do not get a home equity loan if you are considering refinancing your first mortgage any time within the next year - Most lenders will look at the combined total debt from both mortgage loans, even if you only applied to refinance the first mortgage loan. In some cases, having the second mortgage in place, especially if it’s a newer loan, can work against you. Many lenders will charge you a higher interest rate on your refinance loan, or even possibly turn down your application.
