Hundreds of refinance applications have crossed my desk in my time as a loan officer — and I can tell you, there are a lot of things that can throw a refi off course. Fortunately, most of them are avoidable.
Here are the 10 mistakes I see most often, what they’ll cost you, and how to steer clear of them when you’re ready to refinance.
Mistake 1: Not Shopping Multiple Lenders
It’s amazing how many borrowers simply go straight to their current lender when they want to refinance. Sure, it might feel comfortable and convenient, but most of the time, it’s going to cost you — big time.
When shopping for a mortgage refinance, it really pays to check out the competition. In fact, a difference of just one-eighth or one-quarter of a percentage point on your mortgage rate can save you tens of thousands of dollars over the life of your new loan.
Mortgage pricing can also be complicated, with many factors affecting the actual cost, so it’s important to look carefully into the rates, terms, and fees offered by different lenders. Take your time and find the absolute best deal out there.
Mistake 2: Skipping the Break-Even Calculation
The break-even point is an important part of the math when you refinance.
If you only get a small reduction in your interest rate, say half a percentage point, it’s going to take you a long time to recover your closing costs. This is what’s known as the break-even point — or how long it takes the savings from refinancing to exceed what you paid to refinance.
For example, if you paid $5,000 in closing costs and fees, and you saved $100 a month by refinancing, your break-even point would be 50 months — or just over four years. If you sell the home before that four-plus years is up, the refinance will end up costing you more than it saved in the long run.
Most experts say you need to knock at least three-quarters or a full percent off your current rate to make refinancing worthwhile. Larger loan balances can justify a smaller rate reduction than smaller ones, though, because the savings are much greater on higher loan amounts. A small reduction can also be worthwhile if you plan to stay in the home for a long time. (You should still do the break-even math, though, to be sure).
Mistake 3: Focusing Only on the Interest Rate
I mentioned the importance of your mortgage rate reduction above, but it’s not the only number you should be focusing on when you compare mortgage options. In fact, one of the biggest refinancing mistakes I see is when borrowers focus solely on the interest rate and nothing else.
A lot of factors go into mortgage pricing, and a low refinance rate from one lender can actually cost more than a higher rate from someone else once you factor in the loan’s term and fees. Sometimes, a seemingly low rate is used to disguise a loan with unusually high fees. Or, even more often, the rates a lender advertises are based on the borrower having absolutely perfect credit, or they include pricey discount points.
With discount points, you pay an upfront fee at closing in exchange for a slightly lower interest rate. But this changes the math on your break-even point. In the previous example, for instance, adding $1,000 in discount points would take your closing costs up to $6,000 and your break-even point from 50 months to 60 months. That’s five full years until you’d break even on your refinance.
This is why it’s always important to compare lenders beyond their rates. Ask about things like loan origination fees, points, credit reporting fees, appraisals, and all other fees before applying for the loan. After you apply, you’ll get a full breakdown of these costs with an official Loan Estimate from each lender. You can use these forms to compare loan offers line by line, but there’s also a section on page 3 that shows your estimated costs in five years. These numbers can give you a good, long-term look at how several loan options measure up.
Mistake 4: Trying to Time the Market
Mortgage rates are always moving, and that can make it tempting to try and time your refinance perfectly — especially in today’s higher rate environment.
After all, rates have to come down sometime, right?
While it’s true that rates will probably drop from their current highs at some point in the next few years, there’s no crystal ball, and trying to time your refinance almost always backfires. I’ve had clients delay refinancing for months, hoping lower rates would come around, only to find that by the time the refinance was necessary (they needed cash to cover an important home repair), rates had jumped almost a full percentage point.
The truth is, timing mortgage interest rates is like trying to time the stock market — it’s difficult even for the savviest of professionals. The best thing you can do is run the numbers and wait for a rate that works for your budget and refinancing goals. When you hit that sweet spot, refinance and reap the benefits.
Mistake 5: Not Checking Your Credit Before Applying
Your credit history and credit score play a large role in your ability to refinance, not to mention the long-term costs of that loan. Typically, the higher your score and the more spotless your credit history is, the easier time you’ll have getting approved. It usually means a lower interest rate, too. (Typically, scores of 740 or higher will get the best loan offers, but it depends on the lender and loan type.)
But while a lot of borrowers are aware of credit’s role in the process, in my experience, very few actually verify their credit before applying. And many times, it comes back to bite them.
For example, they might think they have picture-perfect credit, but once I pull their reports, there are several late payments they forgot about, there’s an error that needs to be corrected, and their score is 50 points lower than they actually thought.
This is why it’s so important that you check your credit before applying to refinance. Pull your reports from all three credit bureaus — Experian, TransUnion, and Equifax- and go through them carefully. If you see any late payments or collections, settle those. If you spot errors, dispute them with the credit bureau and get them fixed. These can both help your score and improve your chances of getting an affordable refinance.
Mistake 6: Making Large Purchases or Opening New Credit During the Process
Lenders pull your credit and financial info when you first apply for a loan, but they usually do it a second time — right before you close on the mortgage, too. This can be a big problem if you’re not careful.
I’ve seen borrowers get conditional approval on a refinance, only to go open a new store credit card or buy new hardware or furniture for a renovation they’re planning. This lowers their credit score and increases their debt-to-income ratio — both of which send up red flags to a mortgage lender.
If either of these numbers changes, so can your refinance. It can mean a lower loan amount, a higher interest rate, or sometimes, if the borrower really went on a spending spree, denial of the loan entirely.
If you’re looking to refinance, the best course of action is to keep your finances as stable as possible between your application and closing date. Don’t rack up credit card balances or open a new account, and push off any big purchases until after you’ve finalized your refinance.
Mistake 7: Cashing Out More Equity Than You Need
Cash-out refinances are attractive to homeowners in need of cash. They have lower interest rates than many other borrowing products on the market, and their interest is tax-deductible, too, making them affordable options for covering home repairs, college costs, or other major purchases.
The problem lies in when homeowners borrow too much. While you might have a lot of equity, treating it like an ATM and taking out the maximum amount possible is a big mistake. Not only does it mean a higher monthly payment, but if home values fall (which hasn’t happened much in the last decade but is still possible), it could leave you owing more on your home than it’s worth.
I’ve seen it a fair share of times over my career, and it’s never pretty. That’s why I always encourage my clients to be conservative when tapping their home equity. Only borrow what you absolutely need, and be sure to leave a healthy cushion of equity behind, too. This safeguards you in case home prices take a turn.
Mistake 8: Resetting to a New 30-Year Term Without Thinking It Through
I see it time and time again: Homebuyers start with a 30-year mortgage. By the time they’re ready to refinance, they’ve been paying on it for several years and have made quite a dent in their balance (and coughed up tons of cash toward interest). Then, they refinance into a new 30-year mortgage and start all over again.
It’s a move that can reduce your monthly payments quite a bit (after all, you’re spreading out your remaining loan principal over a longer period), but it also increases your total interest costs significantly and leaves you paying off your loan for years — sometimes even decades — longer than you intended to.
A better approach is to refinance into a new, shorter-term loan that closely matches the time left on your current mortgage. For example, if you’ve been paying on a 30-year mortgage for eight years, you might refinance into a 20- or even a 15-year loan instead. Because shorter-term mortgages have lower rates, you can often shave several years off your mortgage with little or even no increase in your monthly payment.
The only time I’d recommend extending your loan term into another 30-year loan is if you’re financially stressed and really need to reduce your monthly expenses. In some cases, if you’re doing a cash-out refinance and increasing your loan balance, it also might make sense — but you’ll still want to run the numbers and carefully consider the long-term costs. Many times, it’s just not worth it in the long haul.
Mistake 9: Not Locking Your Rate at the Right Time
You can’t ever time your refinance perfectly right, but if you use your lender’s rate lock offering carefully, you can do your best to minimize your costs and secure a loan that works for your budget.
With a rate lock, your lender guarantees your interest rate for a set period of time — often 30, 45, or 60 days. This protects you from any rate increases while your loan is being processed and can help keep your monthly payment in check.
But you don’t have to lock your rate. Another option is to “float” it, which essentially means your rate will change with any market fluctuations that occur. If market rates fall, your refi rate will also fall. If rates rise, your refinance rate will rise, too — taking your monthly payment up with it.
It sounds a lot like flexibility, but with how unpredictable mortgage rates can be, it’s one of the biggest regrets I see borrowers leave my office with. They float their rate, hoping market rates will fall in the next month or so, but by the time we’re ready to close on their loan, rates are a half-point higher. By then, it’s too late to do much about it. Their old, lower rate is already gone.
To be clear, locking your rate isn’t always the right move, but if you find a rate and monthly payment you can afford, locking that in is typically the safest bet. If you are thinking about floating, make sure to stay in close touch with your loan officer. You’ll want to lock your rate fast if there are signs that market rates could rise.
Mistake 10: Ignoring the Loan Estimate and Closing Disclosure
You’ll get a Loan Estimate from your lender that details your estimated fees and loan costs shortly after applying for your refinance. But when you’re three days out from your closing date, they’ll also give you another form — the Closing Disclosure.
Where the Loan Estimate is a rough gauge of what you’ll owe as a borrower, the Closing Disclosure is more like an official bill. It should detail the exact fees you’ll owe, as well as how much cash you need to bring to closing.
When you get this form — what we loan officers typically refer to as a “CD” — you must compare it to your Loan Estimate line by line. While it’s normal for there to be slight variances between estimated fees and actual ones, if you see several new fees added or significant changes in what a fee costs, your lender could be trying to slip something by you.
Pay special attention to the “Loan Costs” section, as these are fees charged directly by your lender. Loan origination and application fees are normal in this section; document preparation fees or exorbitant fees to pull your credit aren’t. You can also look at the “Services You Can Shop for” section. If any of these look particularly high, do your research and find affordable alternatives. These are all service providers you can shop around for and replace if you’d like.
Frequently Asked Questions (FAQs)
What Is the Biggest Mistake People Make When Refinancing?
The biggest mistake people make when refinancing is not shopping around for their lender. Rates and fees vary widely by mortgage company, and a rate that’s just a fraction of a percentage point lower can equal thousands in savings on a $300,000 loan.
How Do I Know If Refinancing Is Worth It?
To determine if refinancing is worth it, you should calculate the break-even point by dividing the refinance’s total closing costs by the monthly savings the refinance would give you. This will tell you the number of months it would take to save more than the refinance costs you. If you know you’ll remain in the home long enough to reach that point, then refinancing usually makes sense.
Can You Lose Money by Refinancing?
Yes, you can lose money on a refinance if you sell the home before you reach the loan’s break-even point or if you roll your closing costs into the loan balance and have to pay interest on them. Refinancing can also cost you more if you choose a longer loan term, as it can significantly increase your interest costs over time.
What Should I Not Do Before Refinancing?
If you’re planning to refinance, you should avoid opening new accounts or credit cards, steer clear of large purchases, pay all your bills on time, and keep your earnings and employment stable. Changing any of these financial factors could impact your credit score or debt-to-income ratio and delay (or even completely derail) your loan closing.
How Long Does a Refinance Take?
Most refinances take between 30 and 45 days from application date to closing, though it depends on the lender. Refinances may also take longer if there are appraisal delays, title issues, or missing documentation. Make sure you have your paperwork organized up front, and stay in touch with your loan officer to keep your refinance on track.
Conclusion and Next Steps
There are lots of slip-ups that can throw a refinance off its course, but fortunately, most of them are avoidable with a little planning and forethought (not to mention a good loan officer).
If you’re hoping to refinance, pull your credit, know your goals, and commit to doing your research on loans and lenders. Use Refi.com to get a head start and explore your rate and loan options today.
