The 4 Worst Home Refinancing Mistakes People Make (and How to Avoid Them!)

posted on 07-01-2019

by Christian Hudspeth

If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now.

Mortgage rates are still hovering near historic lows. But with the economy improving and interest rates poised to creep up, many homeowners are itching to refinance and lock in these low rates while there's still time.

Do yourself a favor and take a deep breath. Before you get caught up in the mad rush to refinance at a lower interest rate, you should know that you can lock yourself into some pretty expensive mistakes if you do it wrong.

Make one bad decision, and you could be forced to pay thousands more than you should in closing costs, tens of thousands more in interest charges, or be locked into your mortgage payments 10 or 15 years longer than you need to be. 

To help you steer clear of those traps, here are some of the most common -- and costly -- home refinancing mistakes people make, and how to avoid them:

Mistake #1. Not Shopping for the Lowest Mortgage Refinancing Rates

It may feel comfortable to keep doing business with your local bank, and that's fine! But with online financial tools making it easier than ever to compare bank mortgage rates and potentially save tens of thousands of dollars in interest charges, you owe it to yourself to shop around. 

Even just a half-percentage point interest rate difference between loan offers can add up to big savings. Let's say you wanted to refinance the $250,000 left on your mortgage for a 20 year term. Assuming both banks charged the same closing cost amount, refinancing with a 3.75% APR loan instead of a 4.25% APR loan would save you $15,808 in interest charges ($121,541 in interest versus $105,733) over the life of the loan -- or enough savings to pay for your next car!

Mistake #2. Not Locking in Your Potential Lenders' Quoted Rates and Fees

Because mortgage rates fluctuate all the time with financial news, it's smart to request "locking in" your quoted rates and fees as soon as you receive them in writing from potential lenders.

That way if interest rates on mortgage loans go up (a likely scenario with mortgage rates still at historic lows), a lender can guarantee your quoted rates for as long as 30 to 60 days, even if you don't end up accepting the offer. You just have to remember to ask!

Mistake #3. Not Knowing Your "Payback Period"

Everyone's mortgage situation is unique, so how do you know when it's a good time to refinance? What if you don't know if you'll keep your home for the next decade or longer? Will your potential savings in interest charges be worth it after closing costs? If you care to find out the answers, it's a good idea to know your "payback period" -- the time it takes for your refinancing to pay for itself.

You'll need to find out two things first: your costs and your potential monthly savings on interest. Let's say you have a 5% APR mortgage with $250,000 and 20 years left on it. After shopping refinancing quotes, you find the best deal with a lender offering to refinance your mortgage at 3.75% APR for $3,000 in closing fees (i.e. your costs).

After using a mortgage interest calculator to compare your current loan to the new one, you would find that refinancing would lower your mortgage payment by $168 (i.e. your potential monthly savings on interest) -- from $1,650 per month to $1,482. 

To find your payback period, simply divide your refinancing costs by your potential monthly savings. In this example, if you refinanced and saved $168 per month in mortgage payments, it would take 18 months to pay for the $3,000 in closing costs -- or just 1.5 years for the refinance to pay for itself). 

Mistake #4. Starting over with a fresh 30-year fixed mortgage

Many lenders will ask if you want to "start over" and refinance back to a 30-year-fixed mortgage, even if you've been paying your existing one for the past five or 10 years. They may also try to tempt you by showing you how much smaller your mortgage payment would be. 

Don't fall for it! The reason lenders love to start your mortgage over is because they'll have you trapped in your mortgage for several more years while squeezing tens of thousands of dollars in additional interest charges out of you!

Instead, if you've been paying your existing mortgage for several years, ask potential lenders if they'll refinance your mortgage for a similar term to what your existing mortgage has left on it -- be it a 10-, 15-, or 20-year fixed term. If you have some extra cash and want to pay off your loan earlier (and save thousands in interest charges), you could also take this opportunity to refinance to a slightly shorter term than the one you have.

[Recommended for You: 4 Savings Tips Mortgage Lenders Don't Want You to Know]

Refinancing your mortgage is a delicate decision that can impact you for decades, so you can't afford to make mistakes. Shop around for the best mortgage rates, get all the added fees in writing, and lock in your rate quotes. Do right by these tips, and you could be on your way to saving tens of thousands of dollars in one phone call or a few mouse clicks. Good luck!

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