4 Mortgage Refinancing Mistakes to Avoid
by Maurie Backman | Updated Sept. 16, 2021 - First published on Aug. 16, 2020
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.
1. Refinancing when you don't plan to stay in your home for very long
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.
2. Refinancing when your credit isn't great
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).
3. Not seeking out multiple offers
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.
4. Getting lured in by a no-cost refinance
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.
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