With mortgage interest rates remaining at low levels, it’s possible for many homeowners to save money by refinancing their mortgage to a more competitive rate. Cutting just one-quarter of a percent off your interest rate can save you tens of thousands of dollars in interest charges over the life of your mortgage.
However, it’s also possible to make some simple mistakes that could end up costing you money in the long run if you’re not careful. Here are some common mistakes that many homeowners make when refinancing their home mortgage:
1: Failing to shop around
It’s surprisingly common how many homeowners see a seemingly good interest rate advertised in the newspaper or online and go ahead with submitting an application for a home loan without first checking out what other lenders can offer. Regardless of where you saw the low interest rate advertised, contact your own lender and ask if they’ll consider matching the rate. If they won’t reduce your current rate, check with other lenders to see what else is available before making your final decision.
2: Accepting a long escrow with a non-adjustable rate
Always check whether the lender you’ve chosen offers a clause that allows you some freedom to change your terms if the interest rates move before closing. Some lenders may insist you remain locked into the original interest rate quoted at the time you submitted your application, which could leave you stuck paying higher interest charges than you need to if interest rates do fluctuate before closing.
3: Focusing solely on the interest rate
While the interest rate will be a primary deciding factor for many people refinancing a mortgage, it’s also important to consider other aspects. Take the time to check out the closing fees the lender will charge, as some lenders may charge low interest rates and compensate by charging outrageously high fees.
4: Not reviewing the Good Faith Estimate properly
Your lender should give you a Good Faith Estimate that includes a breakdown of all the costs associated with refinancing your mortgage. The estimate should show you the APR and all the fees you’re expected to pay. Review it carefully and check that there are no surprise fees or additional costs.
5: Setting a longer loan term
When you refinance your home loan, you’re essentially taking out a whole new mortgage with a new 30-year loan term. If you’ve already spent the last 5 or 10 years repaying your mortgage you may not want to extend your loan for another 30 years. The longer loan term may seem to reduce your monthly repayments initially, but you could end up paying far more interest overall as the payments are spread over a much longer term. Try to set your refinance loan term to match the time remaining on your existing mortgage if you can.
6: Cashing out too much home equity
Many homeowners choose to refinance their mortgage to withdraw some cash out of the home equity they’ve accrued. You may want to complete some home renovations, or put the money into other investments, which is just fine. However, by taking out too much home equity you risk exposing yourself financially in the event that housing prices drop dramatically. Be conservative about the amount of money you take out of your hard-earned home equity.
7: Consolidating debt into home equity
It’s common for some homeowners to refinance their mortgage in order to consolidate other debts. The lower interest rate on home loans can help to reduce monthly repayments, especially compared to the much higher rates charged on personal loans and credit cards.
However, debt consolidation doesn’t erase debt. It simply changes it to long term debt that could cost you thousands of dollars more in interest costs over the term of the loan. Keep in mind that a personal loan with 3 years remaining on the loan term could end up costing you more than three times the amount you borrowed if you extend the loan term out to 30 years.
While there are occasions where consolidating can make good sense financially, there are also plenty of reasons not to use your home equity to pay off personal debts. Speak to a mortgage advisor about your refinancing options or you can read online at www.calmtg.com/refinance/debt-consolidation/.
It’s possible for many homeowners to save thousands of dollars in interest costs by refinancing their mortgage to a better rate. Just be sure you’re careful about doing your due diligence and checking the documentation thoroughly before making your decision and avoid making some of the more common mistakes that could end up costing you money instead.
Patrick Ball is a financial officer for a bank who also consults on finance. He loves to share what he has learned by posting online. Look for his articles mainly on money-related websites.