What we'll cover
Numbers to know before refinancing
Which expenses you would pay upfront
Why refinancing too often may not pay off
There are several reasons why a homeowner may consider refinancing their mortgage. It could be to pay less interest on the mortgage, to pull money from the house to put toward another expense or maybe to reduce the term length. Rushing in to the decision to refinance may not benefit your financial situation, so take time to avoid these eight mistakes.
1. Failing to do your homework
To start off on the right foot in the refinancing process, study the following:
Your property value: It may have changed since you last looked or in the years since you signed up for your current mortgage.
Mortgage rate: Get a general idea of current interest rates.
Closing costs: Speak to a lender to get an idea of how much these charges cost.
New payment amount: Use a refinance calculator, to get an idea of what your new monthly payment could look like.
Read more: When is refinancing a mortgage worth it?
2. Assuming you're getting the best deal
Refinancing with your existing lender isn't always the best idea. Sure, they may have all your paperwork and know your payment history, but lenders are often competitive. You could land a lower interest rate by borrowing from a different lender.
3. Failing to factor in all costs
A mortgage refi may save you money in the long run, but going through the process could cost you in the short term. Consider all mortgage refinance expenses:
Credit fees
Appraisal fees
Insurance and taxes
Escrow and title fees
Lender fees (Unlike some big banks and lenders, Ally Home does not charge any lender fees)
To get a better picture of the costs, features and risks associated with your mortgage, review your loan estimate.
4. Ignoring your credit score
Most lenders have minimum credit score guidelines. If your credit score has changed since you applied for your first mortgage, it could affect your refinance and interest rate.
If your credit score has changed since you applied for your first mortgage, it could affect your refinance and interest rate.
5. Neglecting to determine your refinance breakeven point
Determine how long you would need to live in your house to reach the breakeven point by calculating how much refinancing could save you in interest costs against how much you'll pay in fees/closing costs to refinance.
For example, if you're going to save $125 a month in interest charges after refinancing, but closing costs are $5,000, you would need to stay in your home for at least 40 months to breakeven — that's almost four years. (To calculate, divide $5,000 by $125.) If you don't plan to stay in your home that long, it's probably best to stick with your existing mortgage
6. Refinancing too often or leveraging too much home equity
Avoid making the mistake of refinancing excessively to land a low interest rate. The charges to refinance repeatedly could add up over time, negating the benefits.
Be wary of also leveraging home equity too often. Mortgage interest rates are often lower than other types of loans, but it's possible for borrowers to take out too much equity compared to the value of their home. Your refinancing application may be denied if your outstanding loan balance is more than the current property value.
7. Overreaching
A home refinance requires cash on hand to cover all the fees and closing costs. (You can roll these into the balance of your new loan, but you'll pay interest on that amount, costing you even more.)
If you must take cash out of your emergency fund or take a cash advance on your credit card to pay for these expenses, carefully consider whether a refinance is worth it financially in the long run.
8. Assuming that rates and fees are non-negotiable
If you have excellent credit and have done your homework by comparison shopping, you might be able to secure a better interest rate and/or lower fees. Get quotes from several lenders and ask your preferred one if they can match another offer.
Make a game plan to avoid these common pitfalls, and you'll be much better prepared as you go into your refinance.
