Pitfalls in Refinances

Summary

You can be hit by surprises when you refinance your mortgage.

Some of these surprises can cost you thousands or tens of thousands of dollars. Here is some help to protect you.

Rate and Fee Surprise

The largest surprise is a change in your loan when you go to sign your documents.

The interest rate may have changed substantially or the fees may have gone up.

They may be much higher than the initial good faith estimate that you received.

Make sure that when you go to sign your loan documents that you have the option to back out. If you can walk away from the loan you have the negotiating power.

Do not get yourself stuck in a corner when you are refinancing.

Sometimes rates and fees may change legitimately. This is usually because your credit rating may have plunged during the refinance process. Lenders may double check your credit at the last minute before sending out your loan documents.

If the lender sees a sudden late mortgage payment or some other red flag they may even cancel the loan.

Debt Payoff Surprise

You may have current debts that a mortgage lender will want to pay off.

This can include your credit cards, students loans, car loans, and other debts.

If you have co-signed on someone else’s loan you may end up having to pay it off.

You may make a case to the lender that it is “not really your loan” but since you have legal and financial liability they may want it paid off anyways.

This can and does happen. People end up paying off a car loan that they co-signed for a sibling, friend, or child.

This can be a last minute surprise. Check first if you have this kind of problems.

Lenders will often instruct escrow to pay off the debt directly before you get your money. In this way the lender makes sure the debt is paid off.