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Refinancing Do's and Don'ts

Homeowners frequently receive refinance offers in the mail telling them that they have been "pre-approved" for credit based on the equity in their home. When you are wondering how you are going to pay your mortgage and other bills, it may appear very attractive to borrow against your house. But consider this: if you cannot make your current payments, increasing your debt, even if you get some temporary cash, will make it harder to keep your home.

Refinancing your home may be one of the most important and complex financial decisions you'll ever make. Below is our top ten list of advice to consider before you sign that loan document.

  1. Use your home's equity carefully.  Remember, building equity in your home is a key way to build wealth and financial stability.  It builds slowly over time. Homeowners may be able to get some cash by repeatedly refinancing their homes but they will lose equity in their homes. A loss of equity also occurs each time homeowners finance new points and fees.
  2. Never borrow more than you really need. When refinancing, borrow only for items that are needed to protect the home’s equity, such as a lower interest rate, home improvement or other asset building expenditures. Don’t throw away your long term financial security on short term indulgences like vacations or other temporary luxuries.
  3. Think twice before using up equity on unsecured credit. Many solicitations lure borrowers with ideas that they can wipe out their credit card debt with a home equity loan or refinancing their current mortgage. Those debts are unsecured but your home loan isn’t – defaulting on that payment could lose you your house, not just affect your credit rating.
  4. Shop around. Borrowers should talk to several lenders to find the best loan for which they qualify. Understand the best loan terms available in the marketplace and compare the APR (annual percentage rate) of loans from different lenders. The APR takes into account both the interest rate and the points and fees of the loan.
  5. Say NO to "easy money." Borrowers should beware if someone claims "their credit problems won't affect the interest rate."  If it sounds too good to be true, it probably is. If a solicitation is really interesting, get it in writing!
  6. Understand the loan terms. Borrowers should compare loan terms from different lenders. Ask for written estimates that include all points and fees. A NeighborWorks organization staff member can review the information with you.
  7. Find out about prepayment penalties. Borrowers should know if the loan offered to them has a prepayment penalty. Prepayment penalty should be a choice, not a requirement.
  8. Make sure all the loan documents are complete. A borrower should not sign documents that have incorrect dates or blank fields. Be wary of promises that a lender will "fix it later" or "fill it in later."
  9. Ask about additional fees. Borrowers should question any items they didn't ask for. Borrowers should also beware if they are told that single premium credit insurance is required to get a loan, or that purchasing it will help loan approval. Review every fee and compare different lenders' fees to ensure the most competitive loan terms.
  10. If not sure, don't sign. Seek advice from a trusted financial adviser or local NeighborWorks or other homeownership counseling organization.