Mortgage rates are still in the area of record low interest, and many homeowners are still looking to refinance their mortgage to get a lower rate and possibly pull out cash.
But when shopping for a home refinancing loan with cash out, there are many mistakes to avoid that could cost you in the short and long term:
#1 Not Doing Homework
Slow down before you start calling any mortgage lenders! You should do your basic research first. Here is what you need to do before you contact any lenders:
- Find out what your credit score is. Knowing your score will give you an idea of the types of rates you can qualify for. Having this information ahead of time will put you well ahead of the game.
- Get an idea of what your house is worth by talking to a real estate agent. You also can get a rough idea by going to Zillow.com or Redfin.com. A full appraisal is the only way to know for absolute certain however.
With this information, you will have the data you need to start talking to different cash out lenders. This will help you because you can get a good idea of the type of rate you can get – and there is no need to pull your credit.
#2 Opening Up New Credit Card Accounts
When you first apply for a mortgage refinance for cash out, your lender will pull your credit. They also will check it right before you settle. A big mistake that some people make is to make major purchases on credit cards right before they close.
This can cause your loan to get delayed or declined. Every time you open a new account, your score will drop. This will increase your rates.
#3 Low Credit Score
Clearly, the lower your credit score, the more problems you can have getting a mortgage refinance. FHA still insures cash-back refinance loans with only 15% equity.
If you have a credit score of 660 or more, you can qualify for most conventional loan programs. If you are applying for an FHA home loan, all lenders will work with you at 640 or higher. But if you are at 639, some lenders will not accept your application. More borrowers are eligible for the FHA cash-out refinance than conventional and non-prime programs because you only need a 85% CLTV to qualify.
And if your score is under 620, fewer than 10% will work with you. In some cases FHA underwriters may want 20% equity or 80% CLTV to approve a cash out loan to a borrower with below average credit. If refinancing your 1st line does not get approved, consider a bad-credit home equity loan.
#4 Refinancing with Your Current Lender
It is very tempting to make the loan process easier by just using your current lender. But you could pay higher costs if you do so. And you don’t know if your rate will be as low as it could be.
Whatever your situation, you always will be better off to check with several lenders to see if you can get a lower rate. Make the mortgage companies compete with each other, but make sure you are comparing “apples to apples” with disclosures. Many companies will charged a higher interest rate when borrowers are receiving cash back in the loan.
- Shop and Review Lenders and Brokers Online
- Compare Rates and Closing Cost When Cash Out Refinancing
#5 Not Adding Up the Costs
We all want to lower our monthly payment, but there are other things to consider.
Before you decide to do a mortgage refinance, confirm that you don’t have to pay a prepayment penalty to refinance your mortgage for cash out.
Also, factor in what your refinance with cash out is going to cost in closing costs and other fees. Some homeowners don’t realize that a refinance will cost several thousand dollars. If you intend to move out next year, it often doesn’t make sense to refinance at all.
And remember that a no closing cost loan is just a way of wrapping the closing costs into your monthly payment.
#6 Not Checking Your LTV or DTI
A LTV is the loan to value ratio. If you want to borrow $80,000 and the house is worth $100,000, the LTV is 80%. A high LTV does not always stop you from refinancing, but you could have to buy mortgage premium insurance.
Your DTI is your debt to income ratio, and is an expression of your ability to pay your monthly debts. If you have a $4,000 monthly income and your payments on all non-housing loans is $800, your DTI is 20%.
DTI ratios can vary by lender, but if you have a lot of credit card debt, you could have problems doing your refinance.
#7 Failing to Lock Your Rate
Some people decide to ride the markets and hope for a lower rate but this can end up costing you. In the worst case, it could prevent you from refinancing at all.
We recommend that you always get at least a 30 day lock, and a 60 day lock is better. See if your lender provides such a lock.
#8 Other Things Can Go Wrong
If you have good credit and a lot of equity, you could have a very easy time doing a refinance. But not all of us have this good of a situation. Some refinances don’t go well for some of these reasons:
- Documentation is not provided on time
- Income changes or is not clearly documented in paperwork
- Appraisal comes in low, which can prevent you from doing the cash out refinance.
Some refinances can take up to 90 days, so be prepared for things to not go completely smoothly.