 |
 |
 |
FAQ
What are the most commonly made mistakes in buying or refinancing a house?
For most people, their home is the
biggest investment they will ever make. However, few people do the
research necessary to make a good buying decision. The home-purchase
process is extremely confusing for most people. With a little bit of
homework and with advice from family and friends who have been through
the process before, you can make this a little easier on yourself.
There is no substitute for taking the time to educate yourself before
you buy a house末which typically costs you 25% to 40% of your
gross income!
- Looking for a house without
getting pre-approved. Do not confuse a pre-approval with a
pre-qualification. During the pre-qualification process, a loan
officer asks you a few questions and hands you a pre-qual letter.
The pre-approval process is much more complete.
During a pre-approval, the mortgage company does all the work of a
full-approval, except for the appraisal and title search. When you
are pre-approved, you become like a CASH BUYER and have more
negotiating clout with the seller. In some cases (especially in
multiple-offer situations), having a pre-approval can make the
difference between buying a home and not buying a home. In other
instances, home buyers have been able to save thousands of dollars
as a result of being in a better negotiating situation.
Most good Realtors will not show you homes before being
pre-approved because they do not want to waste your time, their
time, and the seller's time. Many mortgage companies will
pre-approve you at little or no cost. They typically will need to
check your credit and verify your income and assets.
- Making verbal agreements! If
an agent makes you sign a written document that is contrary to
their verbal commitments, don't do it! Example: the agent
says that the washer will come with the house, but the contract
says that it will not. In this case, the written contract will
override the verbal contract. In fact, written contracts almost
always override verbal contracts. Buying a house is a very complex
process末but it's a lot easier when everything is in writing.
- Choosing a lender just because
they have the lowest rate. Not getting a written good-faith
estimate. While rate is important, you have to look at the
overall cost of your loan. This includes looking at the APR,
the loan fees, as well as the discount and origination points.
Some lenders add origination points into their quoted points while
other lenders add an origination point in addition to their quoted
points. So when one lenders says 2 points they mean 2 points,
whereas another lender means 2 points plus 1 origination point.
The cost of the mortgage, however, cannot be your only criterion.
There is no substitute for asking family and friends for referrals
and interviewing prospective mortgage companies. You must also
feel comfortable that the loan officer you are dealing with is
committed to your best interests and will deliver what they
promise. Often, the company that has the absolute lowest quoted
rate may not be the best company for your mortgage business.
- Choosing a lender just because
they are recommended by your Realtor. Your Realtor is not a
financial expert. They may not know what's the best loan for you.
The Realtor only gets a commission when your house closes. As a
result, the Realtor may refer you to a lender that is sure to
close the loan, but not necessarily the lender that has favorable
rates or fees. Also, many Realtors refer you to their friends in
the loan business末who again may not be able to get the best
loan for you. Even if the Realtor is very professional and looking
out for your best interest, you should still do homework on your
own.
We recommend shopping for a loan with at least 3 mortgage
companies before you make a decision. There are countless stories
of consumers who wound up paying higher rates or getting a loan
program that was not right for them because they blindly followed
their Realtor's advice.
- Not getting a rate lock in
writing. When a mortgage company tells you they have locked
your rate, get a written statement which details the interest
rate, the length of the rate lock, and details about the program.
- Using a dual agent末i.e. an
agent who represents the buyer and the seller on the same
transaction. Buyers and sellers have opposing interests. A
dual agent in most normal situations cannot be fair to both the
buyer and seller. Most dual agents represent the sellers more
strongly than they do the buyer. If you are a buyer, it is much
better to have your own agent who will be on your side. The only
time you should even consider a dual agent is when you get a price
break from using a dual agent. If that is the case, then tread
carefully and do your homework!
- Buying a house without a
professional inspection. Taking the sellers word that they have
made repairs. Unless you are buying a new house where you have
warranties on most equipment, it is highly recommended that you
get a property inspection, a roof inspection and a termite
inspection. This way you will know what you are buying. Inspection
reports are great negotiating tools when it comes to asking the
seller to make repairs. If a professional home inspector states
that certain repairs be done, the seller is more likely to agree
to do them.
If the seller agrees to do the repairs, have your inspector verify
that they are done prior to close of escrow. Do not assume that
everything has been done the way it was promised.
- Not shopping for home insurance
until you are ready to close. Start shopping for insurance as
soon as you have an accepted offer. Many buyers wait until the
last minute to get insurance and do not have time to shop around.
- Signing documents without reading
them. Do not sign documents in a hurry. Whenever possible try
to get documents that you will be signing ahead of time so you can
review them. It is advisable to ask for a copy of all loan papers
you are signing a few days ahead of the close of escrow. This way
you can review them and get your questions answered. Do not expect
to read all the documents during the closing. There is rarely
enough time to do that.
- Making your moving plans too
tight. Example: you expect to move out of your prior residence
on a Friday and into your new residence over the weekend. So you
give notice to your landlord to end your lease on a Friday and
arrange for movers to come to your house on Friday. Then, your
loan closing gets delayed until the next Tuesday. You now may be
homeless! New tenants could be moving into your apartment, and the
movers are going to charge you for wasting their time. You could
be forced to live in a motel for a couple of days!
A Better Plan: allow for a 5-7 day overlap between closing
and moving. In the long run it is not nearly as expensive, and it
will certainly give you peace of mind.
[Back to the top of this
page]
- Refinancing with your existing
lender without shopping around. Your existing lender may not
have the best rates and programs. There is a general misconception
that it is easier to work with your current mortgage company. In
most cases, your current mortgage company will require the same
documentation as other companies. This is because most loans are
sold on the secondary market and have to be approved
independently. So even if you have been very good at making
payments to your existing lender, they will still have to do their
verifications all over again.
- Not doing a break-even analysis. Find
out what the total cost of the refinance is, then figure out how
much you will save every month. Divide the total cost by the
monthly savings to get the number of months you will have to stay
in the property to break even on your refinancing costs. Example:
if your refinance costs $2000 and you save $50/month, your
break-even is 2000/50 = 40 months. You should refinance if you
plan to stay in the house for at least 40 months.
Note: The break-even analysis only works if you are
refinancing to save money. If you are refinancing to switch from
an adjustable to a fixed loan, or from a 30-year loan to a 15-year
loan, it is much more difficult to perform a break-even analysis.
- Not getting a written good-faith
estimate of closing costs. Your mortgage company is required
to provide you with a written good-faith estimate of closing costs
within 3 working days of receiving the application.
- Paying for an appraisal when you
think that the house may appraise too low. Have the appraisal
company do a desk review appraisal (typically at no charge) to
provide you with a range of possible values. Your mortgage company
can ask their appraiser to do this for you. Do not waste your
money on a full appraisal if you are doubtful about the value of
your house.
- Using the county tax-assessors'
value as the market value of your house. Mortgage companies do
not use the county tax-assessors' value to determine whether they
will make the loan. Instead they use a market-value appraisal
which may be very different from the assessed value.
- Signing your loan documents
without reviewing them. Do not sign documents in a hurry.
Whenever possible try to get documents that you will be signing
ahead of time so you can review them. It is advisable to ask for a
copy of all loan papers you are signing a few days ahead of the
close of escrow. This way you can review them and get your
questions answered. Do not expect to read all the documents during
the closing. There is rarely enough time to do that.
- Not providing documents to your
mortgage company in a timely manner. When your mortgage
company asks you for additional paperwork, jump on it! Do not
complain. They are trying to get you approved, not trying to
hassle you unnecessarily! Jump through the hoops as quickly as
possible. Borrowers who do not respond to requests for
documentation quickly enough run the risk of paying higher rates
if the rate lock expires.
- Not getting a rate lock in
writing. When a mortgage company tells you they have locked
your rate, get a written statement which details the interest
rate, the length of the rate lock and details about the program.
- Pulling cash out of your credit
line before you refinance your first mortgage. Many lenders
have "cash-out" seasoning requirements. This means that
if you pull cash out of your credit line for anything other than
home improvements, they will consider the refinance to be a
"cash-out" refinance. This leads to much stricter
requirements and can in some cases break the deal!
- Getting a second mortgage before
you refinance your first mortgage. Many mortgage companies
look at the combined loan amounts (i.e. the first loan plus the
second) even when they are refinancing the first mortgage. If you
plan on refinancing your first, check with your mortgage company
to find out if getting a second will cause your refinance to get
turned down.
[Back to the top of this
page]
- Not checking to see if your loan
has a pre-payment penalty clause. If you are getting a
"NO FEE" home-equity loan, chances are that it has a
hefty pre-payment penalty clause. This can be very important if
you are planning to sell your house or refinance in the next 3-5
years.
- Getting too large a credit line. When
you get too large a credit line, you can get turned down for other
loans, because some lenders calculate your payments based on the
available credit and not just the used credit. Having a large
equity line indicates a large potential payment, which makes it
difficult to qualify for loans. Note : this argument holds even if
your equity line has a zero balance.
- Not understanding the difference
between an equity loan and an equity line. An equity loan
is closed末i.e. you get all your money up front and then make
fixed payments on that loan, until you pay it off. An equity line
is open末i.e. you can get an initial advance against the line
and then reuse the line as often as you want during the period
that the line is open. Most equity lines are accessed through a
checkbook or a credit card. On equity lines, you only pay interest
on the outstanding balance.
Use an equity loan when you need all the money up front末e.g.
home improvement, debt consolidation.
Use an equity line if you have an ongoing need for money or need
the money for a future event末e.g. you need to pay for your
child's college tuition in 3 years.
- Not checking the lifecap on your
equity line. Many credit lines have lifecaps of 18%. Be
prepared to pay payments at higher interest levels if rates move
upwards.
- Getting a home-equity loan from
your local bank without shopping around. Many consumers get
their equity line from the bank that they have a checking account
with. Use your bank, but shop around first.
- Not getting a good-faith estimate
of closing costs. Your mortgage company is required to provide
you with a written good-faith estimate of closing costs within 3
working days of receiving the application.
- Assuming that your home-equity
loan is tax deductible. In some instances, your home-equity
loan is NOT tax deductible. Perhaps you make too much and fall
into the AMT trap, or perhaps you have pulled out more than
$100,000 cash from your home. Do not depend on your mortgage
company for information regarding this matter末check with an
accountant or CPA.
- Assuming that a home-equity loan
is always cheaper than a car loan or a credit card. A credit
card at 6.9% is cheaper than a credit line at 12% even after the
tax deduction. To compare rates, compute the effective rate of
your home-equity loan, with the rate on a credit card or auto
loan.
Effective rate = rate * (1 - tax_bracket)
Example : If the rate of the home-equity loan is 12% and your tax
bracket is 30%, your effective rate is : 12% * (1-0.3) = 12%*0.7 =
8.4%
If your credit card is higher than 8.4%, then the equity loan is
cheaper, otherwise it is not.
Besides the interest rate, you may also want to compare monthly
payments and other terms of the loan.
- Getting a home-equity line of
credit if you plan to refinance your first mortgage in the near
future. Many mortgage companies look at the combined loan
amounts (i.e. the first loan plus the second) even when they are
refinancing the first mortgage. If you plan on refinancing your
first, check with your mortgage company to find out if getting a
second will cause your refinance to get turned down.
- Getting a home-equity line to pay
off your credit cards if your spending is out of control! When
you pay off your credit cards with your equity line, don't go out
and charge up those credit cards again and put your house on the
line! If you can't manage the plastic, tear it up!
[Back to the top of this
page]
 |
|
|
Privacy
Policy
|
|
|
|
|
