4 Mortgage Refinancing Mistakes

October 2, 2013

mortgage refinance bankingThinking about mortgage refinancing? You’re not alone, with some of the best mortgage rates available in history many people are debating whether they should spend the money and refinance.

The benefit of refinancing comes from borrowing at a lower mortgage rate so you can either lower your payments or reduce your loan term, either way saving thousands of dollars over the life of your home loan.

However, there are some pitfalls to watch out for; here are some of the mortgage refinancing mistakes you will want to avoid:

1. Paying high closing costs.

When you refinance, you are essentially getting a new mortgage to replace your old mortgage. This means fees; origination fees, administrative fees and other closing expenses.

Many people simply pay them, adding them to the cost of the loan and reducing the savings benefit of refinancing your home. Instead, shop around and compare costs between various banks and credit unions. Check out this article on how to lower your home loan closing costs.

2. Not getting a big enough discount on the rate.

Many people refinance because rates have dropped but then find that the difference in the interest rate wasn’t big enough to really save them money. If there is only a small difference, the closing costs can erode the savings you are getting.

If you don’t stay in your house for five to seven years after you refinance, this small difference can actually result in you losing out over all. The generally accepted rule of thumb is that the new rate should be at least a full percent lower than your current rate, and you should be planning to stay in your home for a few years.

3. Waiting too long for a good rate.

It is tricky trying to predict how low mortgage rates will go. In some cases, you might wait too long, and then find that you missed your opportunity. At this point, mortgage rates are unlikely to drop very dramatically again in the near the future. Waiting for even lower rates could mean that you miss out altogether.

Look at the current rates, and then look at your mortgage rate. If you will be saving more than one percent, it might be worth it to just go ahead and refinance now. Rates are not likely to head another full percent lower, but if they head higher, you will have missed out.

4. Taking cash out with a refinance.

One of the biggest mistakes that people make with mortgage refinancing is to get a cash out loan. In this type of refinance, you get a loan for more than you owe. For instance, if you owe $170,000 on your home, but it is worth $205,000, you might refinance for $180,000. You pocket the $10,000 difference between what you actually owe and what you borrowed. (Of course, closing costs can erode what you actually end up with.)

Cash out refinances can be an issue for several reasons. First of all, you are adding to your debt. Another concern is that your cash out refinance could put you above the 80% loan-to-value ratio, and result in the necessity of paying private mortgage insurance, which adds to your costs. Some people like to do a cash out refinance and pay off consumer debt, but if you are not careful, this could land you in even more trouble – especially if you just run up the balances on your newly paid credit cards.

In the end, it’s better to avoid a cash out refinance if you can, and just stick to refinancing what you actually owe on your home mortgage.

What are some other mistakes people make when they refinance? Leave a comment!

This article was originally published September 15th, 2010.

Last updated by .

Miranda

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Miranda
Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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13 Responses to 4 Mortgage Refinancing Mistakes

  • Kevin H @ Credit Bureau Insider

    You can also add accidentally extending the term of your loan to the list. If you refinance a 30 year loan with another 30 year loan you are stretching out the time when you are paying interest.

    The rates look low, but once amortized over a longer time frame the interest charges really add up. You get a lower monthly payment, but wind up paying more in the end.

  • Miranda

    Sam: I haven’t been through it yet; I’m looking into it now :) I’ve been talking with my credit union, and we’ve been running some numbers. Right now, my monthly payment (on a $187,000 mortgage at 6%) is about $1,120. If I refinance just what I still owe (I haven’t been in the house very long), it’ll be $183,000. The credit union says it’ll do it for 4.8%, which would drop my payment to about $965, saving me a little more than $150 a month. However, the CU also says that we can refinance for 4.5% with a 20 year loan, and pay about $1,164 a month. So if we pay $44 more a month, we can get a shorter term and save more over all. Of course, I see that rates have dropped since I talked to the CU, so we might save a little more. In any case, we’re preparing to strike quickly, since these are ridiculously low rates. We want to get something before rates get back up to 5%.

    But, as Ben points out, there is no way to completely predict what will happen. It’s always something of a crap shoot. But, even though Ben didn’t get an even lower rate, he still saved going from 7% to 6%, and that’s nothing to sneeze at.

  • Ben

    I don’t know what Miranda can share but here is some of what I found recently when researching home loans and comparing closing costs.

    In terms of holding out for a better rate, when we bought our first house I think rates were just under 7%. Our house was in the final few months of construction and I was holding off to lock in the rate hoping rates would go lower. Unfortunately they went up instead and we ended up locking in at 7%.

    As rates dropped, we started thinking about refinancing and once they hit 6% we pulled the trigger. Of course they just kept dropping but we weren’t certain how much longer we’d be in the house so we decided not to refinance again. Turns out we were there longer than expected so in hindsight we could have refinanced again and recouped our closing costs and then some with the interest savings.

  • Financial Samurai

    Can you share with us some more specific figures of what you went through Miranda?

    Thanks.

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