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What mistakes are commonly made when buying or refinancing a home?
Buying a home
1. Looking for a home before being pre-approved. As a potential buyer competing for a home, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of buyer preparedness:

Offers are submitted and -

• The buyer is not pre-qualified or pre-approved
• Buyer is Pre-qualified
• Buyer is Pre-approve

The benefits available at each level can be easily understood when viewed from the seller's perspective. Imagine you're a seller in receipt of multiple purchase offers. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.

Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.

Pre-qualified
This buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.

Pre-approved
This buyer has completed a loan application, provided a broker or lender with written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.

As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.

2. Making verbal agreements. If you're asked to sign a document containing instructions contrary to your verbal agreements--don't! For example, the seller verbally agrees to include the washing machine in the sale, but the written purchase contract excludes it. The written contract will override the verbal contract. Do not expect oral agreements to be enforceable.

3. Choosing a lender because they have the lowest rate. While the rate is important, consider the total cost of your loan including the APR , loan fees, discount and origination points. When receiving a quote from a lender or broker, insist that the discount points (charged by the lender to reduce the interest rate) be distinguished from origination points (charged for services rendered in originating the loan). A below market or low interest rate quote may indicate some hidden loan requirements, like a prepayment penalty, requirement for escrow impounds, a short 15 day rate lock or requiring a bigger down payment. Make sure the rate quoted is for your specific loan request.

The cost of the mortgage, however, shouldn't be your only criterion. Select a reputable company which will deliver the loan as promised. Insist on a written pre-approval from the lender. If in the final hours of the transaction you find that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals, and interview several prospective mortgage companies.

4. Not receiving a Good Faith Estimate (GFE). Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the GFE with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

5. Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and program details.

6. Using a dual agent--i.e., an agent who represents the buyer and the seller in the same transaction. Buyers and sellers have opposing interests. Sellers want to receive the highest price, buyers want to pay the lowest price. In the standard real estate transaction, the seller pays the real estate commission. When an agent represents both buyer and seller, the agent can tend to negotiate more vigorously on behalf of the seller. As a buyer, you're better off having an agent representing you exclusively. The only time you should consider a dual agent is when you get a price break. In that case, proceed cautiously and do your homework!

7. Buying a home without professional inspections. Unless you're buying a new home with warranties on most equipment, consider obtaining property, roof, structural and pest control and other relevant inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them.

If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.

8. 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.

9. Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.

10. Not allowing for delays in the transaction. Ideally, all real estate transactions would close on time. In reality, transactions are often delayed a week or more. Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you learn that your transaction is delayed a week. Very likely your landlord is inconvenienced and angry. The eviction process takes a little time, so the Sheriff won't immediately remove you, but this type of stress-producing episode can be avoided. How? Terminate your lease one week after your real estate transaction is scheduled to close. That way, if there is a delay in closing your transaction, you have some leeway.

Refinancing your home
1. 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 lender. In most cases, your current lender 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. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.

2. Not doing a break-even analysis. Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. E.g., if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay in your home for at least 40 months. Note: This is a simplified break-even analysis. If you are considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes more complex.

3. Not getting a written Good Faith Estimate of closing costs. See item number four above.

4. Paying for an appraisal when you think your home value may be too low. Have the appraisal company provide a list of comparable sales (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser or your Realtor may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.

5. Using the county tax-assessor's value as the market value of your home. Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.

6. Signing your loan documents without reviewing them. See item number nine above.

7. Not providing documents to your mortgage company in a timely manner. When your mortgage company asks you for additional documents, provide them immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can be costly.

8. Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program.

9. 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 transaction. This usually results in stricter requirements and in some cases can break the deal!

10. 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) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down. There are many programs where you can apply for both a first and second at the same time.

Getting a home equity loan/line
1. Not knowing if your loan has a prepayment penalty clause. If you are getting a "NO FEE" home equity loan, chances are there's a hefty prepayment penalty included. You'll want to avoid such a loan if you are planning to sell or refinance in the next three to five years.

2. Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit--not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.

3. Not understanding the difference between an equity loan and an equity line. An equity loan is closed--i.e., you get all your money up front and make fixed payments until it is paid if full. An equity line is open--i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance. Use an equity loan when you need all the money up front--e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event--e.g., childrens' college tuition.

4. Not checking the life-cap on your equity line. Many credit lines have life-caps of 18 percent. Be prepared to make payments at the highest potential rate.

5. Getting a home equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account. Consider your bank, but shop around before making a commitment.

6. Not getting a Good Faith Estimate of closing costs. See item number four above.

7. Assuming that your home equity loan is fully tax-deductible. In some instances, your home equity loan is NOT tax deductible. Do not depend on your mortgage company for information regarding this matter--check with an accountant or CPA.

8. Assuming that a home equity loan is always cheaper than a car loan or a credit card. Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. To find out, compare the effective rate of your home equity line with the rate on your credit card or auto loan. Effective rate = rate * (1 - tax bracket) Example: The rate of the home equity line is 12 percent, your tax bracket is 30 percent, your effectiverate is: .12 * (1 - .3) = .12 * .7 = .084 = 8.4 percent. If your credit card is higher than 8.4 percent, the equity loan is cheaper.

9. Getting a home equity line when 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) when 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 be turned down.

10. Getting a home equity line to pay off your credit cards when your spending is out of control! When you pay off your credit cards with an equity line, don't continue to abuse your credit cards. If you can't manage the plastic, cut them up!

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