2 Costly Mistakes to Avoid When Refinancing Your Mortgage

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Mortgage rates have recently fallen sharply and are now significantly below their 2023 peak. This is making refinancing a viable option for many people who bought homes in the past couple of years.

While refinancing could certainly make sense for you, there are a few things to keep in mind before you start filling out applications. Here are two common mistakes I often see people making when refinancing their mortgages, and why they are so important for you to avoid.

1. Don't accept the first loan you're offered

One of the most common mortgage mistakes I see -- whether it's for a purchase or a refinancing -- is applying with one mortgage lender and simply accepting whatever interest rate and loan terms are offered. Under no circumstances should you do this.

It's an important concept to understand that different lenders have different methods of underwriting and approving loans. It is quite common for a home buyer to apply for a mortgage with three or four lenders and get three or four slightly different interest rates.

While I say "slightly different," you might be surprised at how much getting the absolute best rate matters.

Consider this example. Let's say that you have a $400,000 mortgage and are looking to refinance . One lender offers you a rate of 6.375%, while another offers you 6.25% with a similar origination fee. These two interest rates might sound very close, but the lower of the two would save you $11,520 in interest over a 30-year loan term compared with the higher rate.

It might take you a few hours to fill out mortgage applications with several different lenders, but that would be a pretty solid return on your time. It's also worth noting that applying to several lenders won't have an adverse impact on your credit score. There's a special rule in the FICO scoring formula that is specifically designed to encourage rate shopping.

As long as all of your mortgage applications occur during a normal shopping period (defined as two weeks in most versions of the FICO formula), it will be counted as a single credit inquiry for scoring purposes.

2. Don't wait to refinance if it makes good financial sense

As mentioned, most experts believe that interest rates will come down considerably over the next couple of years, but there's absolutely no way to know the timing, or how much rates could fall. In general, trying to time interest rate moves is a losing battle . After all, at the beginning of 2022, most experts predicted the 30-year mortgage rate would stay below 4% for the foreseeable future.

Let's say that you bought a home last year and have a 7.5% rate on a 30-year mortgage. You can get a rate of 6.5% today, and even including the origination fee, the mathematics make sense. But the Mortgage Bankers Association projects that the 30-year rate will fall further to 6% by the end of 2025.

Should you wait to refinance? Not necessarily. Not only is there absolutely no guarantee that you'll be able to get a 6% interest rate next year, but in the meantime, you'll continue making your payments at your current (high) rate.

There is no rule that says you can only refinance once. Mortgages are an ongoing one-way renegotiation. I have friends who refinanced two (or even three) times as rates plunged in 2020 and 2021.

Is refinancing right for you?

Thanks to expectations of interest rate cuts starting later this year, mortgage rates have recently fallen to their lowest level in 15 months. The average 30-year mortgage rate is 6.49% as of the latest data, well below the 2023 peak of nearly 8%.

The short explanation is that if you're planning to be in the home long enough that the monthly cost savings of refinancing will more than justify the costs of refinancing, it can be a good time to take a closer look at refinancing.

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