Saturday, May 17, 2008

Insiders secret tips to refinancing - part 1

This is the first of 2-4 segments on tips I've gathered in the past week on refinancing a home mortgage. These are tips from people in the business, who were kind enough to share them with me. And I'm dumb enough to share them with everyone.

Why share them? Because I frankly don't trust lenders. While a lot of effort has been put into an attempt to make the process seem logical and clear to the layperson, the reality is that this is confusing as heck.

My personal tip: The top hits you receive for "mortgage refinance calculator" will return some good options, but few and far between are the tools that remember to account for taxes and insurance. This is very important, as they are key components to your monthly payment.

The first set of tips come from someone within the lending business:
  1. Get a legitimate Good Faith Estimate to firm up your expenses.
  2. Understand that rates may fluctuate from one day to the next, and even from hour to hour.
  3. Is it the type of loan you want? 30 Fixed or ARM and so on?
  4. Make sure you check on the proposed changes to your property taxes and you home owners insurance.
  5. Do something with the savings that accumulates wealth over time.
  6. Make sure that your prospective lender is able to refinance you now. There MAY be issues with what is called "title seasoning". Title seasoning basically amounts to the time you have been in your home and many banks require at least 12 months. Some allow 6 but many require 12. DO NOT pay for an appraisal or application fee for a mortgage unless you know for sure the title seasoning will not impede your loan closing.
#1 is key. ALWAYS get a GFE. This is akin to a lender's draft contract. It is a standard format proposal that shows you where all the money is going. The GFE is how you compare "apples to apples".

#2 in the current market is important as rates absolutely change from day to day, and very well may change from AM to PM, or hour to hour. I'm still not sure how the whole "rate lock in" part works, but when you hear a rate you like, lock it in, and make sure it's on your GFE (see #1).

#3, a no-brainer. Check the GFE for the type of loan and for its period. Be careful when the lender says "let me send you some more creative options". Typically this is when the dreaded term "ARM" gets used. And don't go from a 30 year to a 20 or 25 year unless you plan on paying off your loan. It's not worth it.

#4 this goes back to the GFE, you need to make sure your escrow payments cover the taxes and insurance. There are some accounting elements to this that I'll cover later on.

#5 This SHOULD BE why you are refinancing. If you don't know what you are going to do with the savings, then well, you're an idiot. Pay off your car. Pay off your credit card. Budget for 401k contributions. Make a ROTH IRA contribution. Start a 527. Do something smart, don't buy a new tv...

#6 "Title seasoning" issues are rare, but you need to call your current lender. And also check with them what the loan payoff amount will be. If you owe them even just $1000, you'll have to pay them more than that. It just works that way.

Please feel free to follow up with comments and questions.

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