Refinancing replaces a homeowner’s existing mortgage loan with a new one. Homeowners might do this to change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), to get better interest rates or a shorter loan repayment schedule, or obtain other, more favorable terms.
Although refinancing can be a great way to save money, many people fall into the trap of some common refinancing mistakes.
Here are some mortgage refinancing mistakes to avoid that could potentially cost you more money and disrupt your financial plans in the long run.
[Related: Seven Questions to Ask Yourself Before Refinancing]
Mistake #1: Not Doing Your Homework
Make sure you’ve done your research before you embark on your refinancing journey.
Study up on things like current housing trends, your property’s value, the current average interest rates, and a ballpark of your expected closing costs. You can even use an online refinance calculator to see what your new monthly payment would be if you go through with a certain refinance.
Doing all of this research will help you begin the process with confidence, ready to make the best decisions for your refinance plan.
Mistake #2: Not Checking Your Credit Score
Many lenders have minimum credit score guidelines for mortgage refinancing. If your credit score has changed since you applied for your existing mortgage, your ability to refinance and the expected interest rate could also change by a point or more.
What’s worse, a poor credit score could prevent you from qualifying for a home refinance at all.
Check your credit score through a credit agency like Equifax or TransUnion. If you need to increase your score, pay your bills on time and work to reduce outstanding debt. With time, it will put you in a better spot to refinance.
[Related: Second Mortgage vs. Cash-Out Refinance]
Mistake #3: Not Having Job or Location Security
Before refinancing, you should take a hard look at your job security and future plans.
For example, if your job or field has experienced layoffs or if your employer is struggling, maybe consider a different time to refinance. If you’re planning on moving in the near future, make sure however you refinance your current mortgage allows you to break even before you relocate.
Refinancing should help you financially, not cost you more in the long run, so make sure that now is a good time to go through with it.
Mistake #4: Not Saving Enough Money
Refinancing your mortgage is great if you need to cut costs, renegotiate terms, and save money. But you need to make sure your refinancing terms make it worth it.
Remember, like with any mortgage, refinancing requires paying closing costs and other fees. Many experts suggest finding a refinance situation that will eliminate at least three-quarters or a full percent off of your current rate to make it worthwhile.
[Related: Seattle’s Current Housing Market]
Mistake #5: Not Shopping Around
You may be tempted to go straight to your regular bank for refinancing, or to choose the first lender you find with a low interest rate. But not shopping around can end up being a big mistake.
Mortgage pricing can be complicated, so check out several lenders and look carefully into the rates, terms, and fees. Take your time to find the best one for your current situation.
Mistake #6: Extending Your Loan
It may seem obvious, but spending years making payments on your 30-year mortgage and then refinancing to another 30-year mortgage will make you start all over again. Even if your monthly payments are decreasing, doing this will likely cost you more in interest in the long run since you’re amortizing the loan balance over a longer time.
Consider refinancing to a shorter-term loan that is similar to how much time is left on your current mortgage.
[Related: Six Mistakes New Homebuyers Make]
Mistake #7: Refinancing Too Often
Interest rates are at historic lows. As a result, people who have refinanced recently may be tempted to do so again in order to lock in the lowest rate.
This can mean trouble if you aren’t careful.
In order to refinance, you usually pay around 2 to 6% of the loan balance in closing costs. Refinancing too often can pile on the closing costs and additional fees while continuing to increase your loan balance. This will essentially cancel out the original benefits of refinancing to save money.
Try to make an educated decision about how and when you will refinance — and stick with it.
Contact Seattle Mortgage Planners Today
Seattle Mortgage Planners is your top resource for everything you need to know as an existing homeowner looking to refinancing. Check out our rate watch services or contact us today to connect with one of our experts.