8 Common Mistakes Homeowners Make When Refinancing Their Mortgage
Refinancing a mortgage can be a smart financial move, whether you’re looking to lower your interest rate, reduce the term of your loan, or tap into your home’s equity for other expenses. However, rushing into refinancing without doing the necessary research can lead to costly mistakes. Before making any decisions, consider these eight common refinancing pitfalls — and how to avoid them.
1. Failing to Do Your Homework
Before diving into the refinancing process, it’s crucial to gather important information that will shape your decision:
- Property value: Your home’s value may have changed since you last looked, especially if market conditions or home improvements have shifted its worth.
- Current mortgage rates: Get a clear idea of current interest rates to determine if refinancing makes sense.
- Closing costs: Consult with a lender to estimate the closing costs, which typically include application fees, title fees, and more.
- New payment amount: Use an online refinance calculator to estimate your new monthly payment based on the loan terms and rates you’re considering.
By doing this research upfront, you’ll be better equipped to decide if refinancing is the right financial move for you.
2. Assuming You’re Getting the Best Deal with Your Current Lender
While sticking with your current lender might seem like the easiest option — they already have your paperwork and payment history, after all — it’s not always the most cost-effective. Many lenders are competitive, and shopping around could land you a better interest rate. Don’t be afraid to explore offers from other banks or mortgage companies before committing.
3. Failing to Factor in All Costs
Refinancing could save you money in the long run, but it comes with upfront costs. Be sure to account for all potential expenses, including:
- Credit fees
- Appraisal fees
- Insurance and taxes
- Escrow and title fees
- Lender fees
Some lenders may offer low-fee or no-fee refinancing options, but it’s important to review the total costs carefully to understand the financial impact.
4. Ignoring Your Credit Score
Your credit score plays a critical role in the interest rate and terms you’ll be offered when refinancing. If your credit score has dropped since you first took out your mortgage, it could negatively impact your refinancing terms. Conversely, if your score has improved, you may qualify for a better rate.
Before applying for a refinance, check your credit score and consider taking steps to improve it if necessary. This could mean paying down debts, correcting any errors on your credit report, or ensuring timely payments.
5. Neglecting to Determine Your Refinance Breakeven Point
One key calculation to make before refinancing is determining your breakeven point — the point at which the savings from a lower interest rate cover the cost of refinancing.
For example, if you’re saving $125 a month after refinancing, but the closing costs are $5,000, you’d need to stay in your home for 40 months (almost four years) to break even. If you don’t plan to stay in the home for at least that long, refinancing might not make financial sense.
6. Refinancing Too Often or Leveraging Too Much Equity
Refinancing multiple times to chase lower interest rates can actually end up costing you more in the long run due to the repeated fees and closing costs. It’s essential to evaluate whether the potential savings outweigh the costs before refinancing again.
Additionally, be cautious about taking out too much home equity. If your outstanding loan balance exceeds your home’s value, lenders may deny your refinancing application. Even if approved, borrowing too much equity can leave you financially vulnerable if property values decline.
7. Overreaching
A refinance typically requires cash to cover closing costs and fees. While it’s possible to roll these costs into your new loan, doing so means you’ll pay interest on them, driving up your total cost over time.
If you find yourself dipping into your emergency fund or using credit cards to cover these expenses, reconsider whether refinancing is the best move for your financial situation.
8. Assuming Rates and Fees Are Non-Negotiable
Many homeowners don’t realize that interest rates and fees are often negotiable. If you have a strong credit history and have done your homework by getting quotes from several lenders, you may be able to negotiate a better deal. If one lender offers a lower rate or fewer fees, ask your preferred lender if they can match or beat that offer.
Final Thoughts: Avoiding Refinancing Mistakes
Refinancing your mortgage can be a powerful financial tool, but only if it’s done with careful consideration. By avoiding these common mistakes — such as failing to do proper research, overlooking costs, or refinancing too frequently — you’ll be better prepared to make the best decision for your financial future. Before committing, consult with a financial professional to ensure that refinancing is the right move for your unique situation.