10 Mistakes To Avoid When Refinancing Your Home

A recent cut in the interest rate by the Federal Reserve could be prompting you to consider refinancing your home.

Refinancing could be a good option if you want to adjust the terms of your current mortgage, especially with rates declining now. It can also benefit you if you need help paying your mortgage or want to save some extra money for other expenses.

But before you decide to refinance, consider these things to avoid issues or end up paying more money.

1. You skip your homework

One of the most important parts of the refinancing process is deciding whether you should go through the refinancing process.

There are plenty of variables to consider when you consider refinancing, so don’t just assume lower rates mean you should refinance.

It’s also a good idea to take into account how much lower your new rate could be as well as your current property value, which might have changed over your years of ownership.

2. You forget about the extra costs

Refinancing means trading your old mortgage for a new one, but the new one could include fees similar to any mortgage.

When you refinance, it’s important to factor in closing costs and other fees as part of your overall payment. You may be surprised to find that your payment might not change much when you factor in these costs and fees.

3. You don’t have a good credit score

Remember that you’re applying for a mortgage in a way similar to the original mortgage you took out on your home.

But things can change since you first got that mortgage, such as additional debt or other hits to your credit that could bring your credit score down. That lower score could change the more appealing terms you got when applying for your original loan.

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4. You made large purchases recently

You might think that you have a good credit score, so you’ll be able to buy a new car or purchase some big-ticket items before the refinancing process is complete.

However, closing on a home and closing on a refinanced home have similar steps, including checking your credit report right before the closing. Major purchases could be major issues on your report and might affect your closing date.

5. You aren’t shopping around

You might think that you have to go with the same lender for your original mortgage and your refinanced mortgage.

Your current lender may give you a better deal as an existing customer, but you should also shop around and compare refinancing terms with other financial institutions. You may be surprised at the affordability of other options.

6. You increase the length of your loan

One reason you might want to refinance your mortgage is to lower the monthly costs with a longer loan term.

But you’ll want to carefully calculate a longer term. Your monthly costs could drop, but a longer term could mean you end up paying more in interest over the length of the loan.

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7. You don’t have enough equity in your home

You can buy a home with less than 20% of the cost for a down payment, but that usually requires you to pay extra for a mortgage insurance premium.

That cost doesn’t go away when you refinance, so make sure you include that fee in your calculations if you still don’t have enough equity invested in your home to reach 20% when you’re ready to refinance.

8. You take a cash-out refinance

You may need money now for a big-ticket purchase or to pay off debt, and refinancing can unlock some of the equity you have invested in your home to spend elsewhere.

It could be a good option given your circumstances, but taking equity out of your home can come at a cost and it will mean that you won’t have as much invested in your home anymore.

That could affect how much you end up owing on the new loan and your financial investment in your home.

9. You continue to refinance

You might think it’s a good idea to refinance anytime rates drop, and you can get a new deal at a new rate.

However, repeated refinancing plans mean repeating applications and paying repeating fees, which could end up costing you more in the long run.

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10. You didn’t factor in your future plans

Refinancing can be a good option if you plan to stay in your home for several more years and want to reduce costs over the loan's lifetime.

On the other hand, it may not be worth the extra fees and extra work to apply for refinancing if you’ll be in the same situation in a year or two when you move to a new home and have to go through the mortgage process again.

Bottom line

Refinancing a home can be a good option if you’re trying to get out of debt with the money you could save or want to invest your cash for other things like retirement with your monthly savings.

But it’s important to remember that your home is likely your most expensive asset, so it’s a good idea to take the process slow and make sure it’s the right decision for you at the right time.

You don’t want to end up spending more money or making costly mistakes when it comes to refinancing a home.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).