A) Buying a house
B) Refinancing your house
C) Getting a home-equity loan

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--which typically costs you 25% to 40% of your gross income!

Buying a house

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--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--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--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 Top

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 Top

Getting a home-equity loan

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--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--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--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--e.g. you need to pay for your child's college tuition in 3 years.

Not checking the life cap on your equity line. Many credit lines have life caps 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--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 Top