Common Refinance Mistakes Homeowners Make and How to Avoid Them

The biggest refinance mistakes usually come down to three issues: not being clear on your goal, not comparing lenders carefully, and focusing only on the rate or monthly payment instead of the total long-term cost. A refinance can still be a smart move, but only if it fits how long you plan to keep the home, the fees involved, and what you want the new loan to accomplish.

If you are deciding whether to refinance now, it helps to look past the headline rate and evaluate the full picture. Below are the most common refinance mistakes homeowners make and practical ways to avoid them.

Why Should You Consider Refinancing?

First and foremost, if you are wondering why you should consider refinancing at the moment, then you have come to the right place. In general, a mortgage refinance is a fairly painless way to trade in your current loan essentially for a better, new loan. 

Many homeowners refinance to lower their payment or interest rate, while others refinance to turn pent-up home equity into needed cash. Many homeowners also refinance into a shorter term, like a 30-year loan into a 15-year one. So, if you are interested in saving money on your mortgage or accessing your home’s equity—then you should seriously consider refinancing.

Common Mistakes Homeowners Make When Refinancing

There are several refinancing mistakes you should avoid to ensure that your mortgage refi goes smoothly.

Not Checking or Optimizing Your Credit Score Before Applying

As you are likely aware, your credit history is important when you are looking to refinance. Yet, many homeowners make the mistake of not checking their credit scores before deciding to apply for refinancing. 

Instead, not only should you check your credit score or history, but you should also look out for inaccuracies. In doing so, you can ensure that your credit history is correct and thus have access to the best terms possible. Note, it is also important to prepare for a refinance by getting your finances in order and by avoiding large purchases that can negatively impact your credit score in the meantime.

Failing To Comparison Shop or Negotiate Fees

Another common mistake homeowners make is failing to comparison shop. Yet, data suggests that obtaining multiple rate quotes from just a handful of lenders can cut a homeowner’s interest rate by as much as .50 percent. 

Thus, it is in your best interest to shop around, especially since your current lending institution may not offer the best deal. You can avoid this mistake by simply comparing rates from three to four lenders before deciding and keeping in mind that rates fluctuate.

Along those same lines, many homeowners assume that you have to accept a refinance offer “as is.” However, just like interest rates, many fees may be negotiable. Furthermore, when you comparison shop, you just might be able to use those multiple offers to your advantage and bargain for a better deal. 

Note, third-party fees may also be negotiable, depending on your state’s laws. Here, it is beneficial to do a little research in order to know what your options are and to avoid overlooking possible irrelevant fees.

How To Decide Whether a Refinance Actually Makes Sense

Before moving forward, look at the refinance as a full financial decision rather than just a chance to get a lower rate. Start with your goal: are you trying to reduce your monthly payment, lower your rate, shorten your term, or pull out equity for a specific purpose? A refinance is easier to evaluate when the goal is clearly defined.

Next, weigh the total cost of the new loan against how long you expect to keep the home. Closing costs, points, and other fees can offset the benefit of a lower payment or rate, especially if you may move or refinance again before those costs are recovered. In simple terms, your break-even point is how long it takes for the monthly savings to make up for the upfront cost of refinancing.

Also pay close attention to whether the lower payment comes from a better loan or just from stretching repayment over a new long term. Resetting the clock on your mortgage can help cash flow in the short run, but it may also increase the total interest you pay over the life of the loan. If your payment drops mainly because the term is being extended, make sure that tradeoff still supports your long-term plans.

A good refinance should fit your timeline, your budget, and your reason for making the change. If it does not improve the full picture after fees, timing, and term length are considered, it may be worth waiting or exploring a different option.

Tapping Into Home Equity Too Aggressively

Homeowners also sometimes tap into their home equity haphazardly. In other words, a common mistake is financing short-term expenses with a long-term loan. For example, a car with a five-year life may not justify a 30-year mortgage loan. 

Likewise, a mortgage is an expensive way to pay for a vacation. Instead, homeowners are likely to fare better (receive more value) by investing in home improvements, a college education, or a promising business venture with proceeds from a cash-out refinance. 

Ultimately, the best way to avoid this refinancing faux pas is to ask yourself, will your equity, if tapped, yield long-term returns? A cash-out refinance might be your next move if the answer is yes.

Refinancing Too Often Without a Clear Goal

Refinancing can be extremely beneficial and a good decision, especially if you are looking to yield long-term returns. But refinancing has its time and place. A common mistake is refinancing too often without a defined reason, particularly when doing so repeatedly resets the loan term.

This can happen when a homeowner chases payment relief from one refinance to the next without looking at the bigger picture. While the monthly payment may improve, extending the mortgage again and again can cost more over time.

Of course, there are instances where another refi makes sense. A prime example of this is if the lowest possible payment is your goal, then extending your home loan term again or rather so soon is likely the best move.

Alternatively, a homeowner may also refinance a mortgage with a shorter term. Thus, in this particular instance, this common mistake is not applicable. That said, if you are looking for a way to avoid frequent refinancing from extending your mortgage term, making additional principal payments can help.

Not Checking Your Property Value Beforehand

According to a Fannie Mae survey, a significant number of homeowners underestimate the value of their homes. By failing to obtain an accurate estimate of your home’s value, however, you might end up overlooking savings opportunities, miss out on the chance to eliminate mortgage insurance or forego a lower interest rate. 

That said, most refinancing options require an appraisal and do take into consideration your home’s value. But if you opt for an FHA streamline refinance, an appraisal is typically not required. 

Similarly,  VA loan rates are not based on the home’s value, and thus a lender often will not request an appraisal. Nevertheless, regardless of the loan product or type of refinancing, obtaining a realistic estimate should not be something you skip for the aforementioned reasons.

Lastly, homeowners sometimes forget to check the estimate before they agree to a refinance–so do not make that mistake. And remember, even though there are opportunities to save here, there are other fees and costs to consider (points, origination fees, additional fees that affect closing costs, etc.). Therefore, you should make it a point to review your estimate, so there are no surprises when it comes to these costs.

Tips To Ensure a Smooth Refinancing Process 

Overall, to ensure that the entire process runs smoothly, you can do a few things, like make sure the refinance benefits you, know your ultimate goal for the refinance, properly prepare for a refinance, and avoid the above-mentioned common mistakes. 

It is also vital that you do your research and understand how to have the best experience possible when refinancing your home. That said, you should also speak to a trusted mortgage professional who can assess your unique situation and future goals to ultimately help you make the best decision.

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Have Questions About Mortgages?

Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to explore your refinance options.