by Maurie Backman | Aug. 16, 2020
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Looking to refinance? Don't fall into these traps.
In case you haven't been following the news, mortgage rates reached record lows during the summer of 2020. As of August 4, you could refinance a 30-year mortgage at around 3%, assuming your credit score qualifies you for the top mortgage rates available. But before you rush into a refinance, take the time to think it through. That way, you'll be more likely to avoid these costly mistakes.
Get free access to the select products we use to help us conquer our money goals. These fully-vetted picks could be the solution to help increase your credit score, to invest more profitably, to build an emergency fund, and much more.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
When you refinance your mortgage, you swap your existing home loan for a new one -- ideally, one with a much better interest rate attached to it. Refinancing makes a lot of financial sense when you plan to stay in your home long enough to reap the savings involved. But if you're planning to move in the near future, it might cost you more money than you save.
Just as you paid closing costs when you finalized your original mortgage, you'll pay closing costs to refinance a mortgage, too. There's no preset amount for what closing costs will be, but you should expect to pay anywhere from 2% to 5% of your home loan's value.
Now, imagine you incur $5,000 in closing costs by refinancing, but you also lower your monthly mortgage payments by $200. In that case, it will take you 25 months, or just over two years, to break even. If you're planning to move in a year, refinancing doesn't make sense.
Your goal in refinancing your mortgage should be to snag the most competitive interest rate possible. But if your credit score is far from stellar, you won't qualify for a top rate. That's why it pays to work on boosting your credit before applying to refinance. You might be able to do so relatively quickly by paying off a chunk of existing debt, or by correcting any errors on your credit report that work against you (like a delinquent debt that isn't actually yours).
Different lenders set their own requirements when it comes to approving refinance candidates and giving out offers. It pays to seek out refinance offers from multiple lenders rather than settle for the first offer you receive, as doing that legwork could help you walk away with a better deal. And if you do all of your mortgage refinance shopping within 30 to 45 days, it will only have a minimal impact on your credit score. Applying to refinance involves a hard inquiry on your credit report, which can ding your score. But if you apply with multiple lenders within a short time frame, it will count as a single inquiry.
Some lenders advertise refinancing offers with no closing costs. But in reality, there's no such thing as a no-cost refinance. What these lenders do instead is roll your closing costs into your loan or charge you a higher interest rate than you'd pay with another lender. Now, this doesn't mean that a no-cost refinance won't work out well for you. In some cases, you might get your best offer via a no-cost refinance. Just don't make the mistake of thinking you're getting away without paying any closing costs at all.
Refinancing your mortgage could be a major money saver, but only if you go about it the right way. Avoid these mistakes, and with any luck, you'll enjoy the benefits of refinancing your home loan for many years to come.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.