3 Common Mistakes in Mortgage Refinancing and How to Avoid Them

Ideally, refinancing works like this: You leverage your credit gains to score a lower rate and therefore save big on your mortgage payments. But some common mistakes can eat into those savings, and potentially even make refinancing an expensive financial misstep. It's important to make sure the process is really giving you the benefits you need.

Here are three mistakes to avoid when looking to refinance your mortgage.

Mistake 1: Not shopping around

Your mortgage lender may send you an offer to refinance your loan, and you may think, “Great, I'm done." If you like and trust your existing lender, and it's offering a great deal, that could be the right move. Even so, it's still vital to shop around to ensure you're getting the best loan available. For example, your mortgage lender may not offer the same perks as other lenders or be as competitive with interest rates. The thing is: You won't know until you look elsewhere.

As we'll cover below, the rate and fees can have a major impact on how much you save and even whether it's worth the effort to refinance. The best first step here is checking out the top mortgage refinancing lenders and getting quotes whenever possible to understand the full range of your options.

Mistake 2: Forgetting to factor in all refinancing costs

You'd think houses were expensive enough, based on the sticker prices, but mortgages -- included refinanced ones -- also require you to pay closing costs. These generally run from 2% to 5% of your loan amount, but can vary by lender. This can include things like a loan application fee, underwriting fee, origination fee, and mortgage insurance.

So, for example, if you were to refinance a $300,000 mortgage, you could expect the closing costs to be about anywhere from $6,000 up to $15,000. Assuming you're saving $300 per month with your new loan terms, it would still take 20 to 50 months for you to recoup those costs. That may not be a problem if the house is your forever home, but those looking to sell soon may need to consider this expense more seriously.

The Good Faith Estimate (GFE) should list off the various fees associated with the loan, giving you a more accurate picture of the total costs. This document is required for most types of mortgages, and should be provided by the lender within a few business days of receiving your application.

Mistake 3: Only focusing on the rate

The APR associated with your mortgage is a major factor you should consider when refinancing. It can cut thousands of dollars off of your mortgage. But it's not the only thing you need to scrutinize. For instance, the new loan term can also be make or break, depending on your circumstances. Let's say your existing mortgage has 15 years left on it, with a $200,000 balance and a 4% interest rate. If you were to refinance down to a 3.5% rate, but selected a 20-year term, you'd end up paying just over $100,000 more for that new loan over the course of that new term.

That's why using a mortgage refinancing calculator is a vital part of the process. You should also look at factors like what fees are included in the closing costs, and the lender's customer service reputation to ensure it's the right fit.

Refinancing your mortgage can help you save money, both on the monthly payment and in the long term. But if you don't take a holistic approach -- considering the full scope of the fees and terms available from multiple lenders -- you could end up missing out on the benefits.