4 Common Mortgage Refinancing Mistakes

With 30-year fixed-rate mortgages approaching historical lows of 3%, you may be thinking about refinancing an existing mortgage. But you better read the fine print before signing on the dotted line to avoid paying too much money. Here are 4 common mistakes homeowners make when refinancing their mortgage.

1. Not shopping around

When looking to refinance a mortgage, many homeowners simply check a couple advertised rates and pick the lowest one. But there are many factors affecting the total cost of refinancing, so it pays to carefully look at not just rates, but also terms and fees offered by different lenders.

Remember that a mortgage with a lower rate and higher closing costs from one lender can ultimately cost more overall than a mortgage with a higher rate but lower closing costs from another lender.

2. Saying yes to current mortgage loan forbearance

Loan forbearance occurs when your cur­rent lender allows you to either delay making a payment or lower your future payments. If you are considering refinancing in the future, think twice before taking advantage of this offer.

Accepting a bank's offer to skip a couple payments, even during a pandemic, may signal cash flow problems to your next lender that could negatively affect your mortgage refinancing options.

3. Not improving your credit score

The willingness of banks to lend you money at favorable rates is often contingent on your credit score. You must there­fore know your current score and actively work to improve it. So don't take out a new loan or credit card in the months leading up to refinancing.

Also pay your bills on time and never use more than 15% to 20% of your available credit line on credit cards. By improving your credit score you can vastly improve your interest rates and related closing fees.

See our article “6 Tips to Great Credit Score” on improving your credit

4. Not looking over the good faith estimate

Origination fees, points, credit reports and other fees are all included with closing costs when refinancing a mortgage. These fees are not finalized until you receive a good faith estimate. Any changes you notice on this estimate compared to what you were originally told is a red flag.

Compare the final refinancing document you're about to sign with the rates and fees initially presented to you. Challenge any increases.

By being aware of refinancing pitfalls, you can actively eliminate any surprises and create a situation where multiple lenders are fighting for the right to lend you funds.