Money Mistakes Many People Make Before Refinancing Their Homes

Like deciding when to take advantage of the 4th and goal, refinancing a home comes with many opportunities and pitfalls.

Due - Due

The reason you might consider refinancing is that you want to pay less interest. Or, if you need to invest in another expense, you can take money out of your house. You may even want to shorten your term.

These are all good reasons to refinance. However, if you want to maximize these advantages, as well as take advantage of the current market, which favors refinancers since mortgage rates are at historically low levels, you could be making a hasty decision that is not right for you.

Are you now considering refinancing your home? Here are twelve costly mistakes you should avoid so you can score a touchdown with a refi.

1. Considering interest rates only.

Whenever interest rates drop, many people think about refinancing. A lower interest rate may lower your monthly mortgage payment, but there are other factors that will affect it. For example, there may be a drop in interest rates, but are they lower than the amount you financed your home? Has your credit rating dropped since you first financed your home? Can you cover closing costs with your savings?

Remember that getting a refinance is like getting a new loan. This means you will have to pay closing costs and your lender will review your credit score. Therefore, before refinancing, be sure to compare your current interest rate with today's rates, check your credit score, and make sure you can afford the closing costs.

2. Not shopping.

When you need a home loan or refinance, you might be tempted to go directly to your usual bank. Or maybe you just check out a few lenders and choose the cheapest. And many people think they should refinance with their current lender.

Here's the thing though. When you refinance your mortgage, you need to research your options. You can save tens of thousands of dollars over the life of your mortgage with a difference of as little as an eighth or a quarter percent.

Mortgage pricing can also be tricky, with many factors affecting the actual cost, so compare rates, terms and fees from different lenders carefully. You will also want to use a refinance calculator to help you determine what your new monthly payment will be.

In short, don't rush when it comes to refinancing your home in order to find the best idea available.

3. Restart the clock for another 30 years.

Each time you refinance your mortgage, you should avoid setting the meter back to 30 years on your new mortgage, advises Alvin Carlos of District Capital.

"This means that if you've already had your mortgage for five years, you don't want to extend your mortgage and pay over 30 years when you would have just paid over 25 years remaining." Carlos explains.

An extra 30 years may sound attractive, as it will reduce your current monthly payment and may seem like an immediate saving. However, if you reset the clock to 30 years instead of 30, you will pay significantly more interest than if you had kept the original 30-year mortgage.

"To avoid this, you can ask your lender to amortize the newly refinanced mortgage over 25 years rather than 30," suggests Carlos. "You can also do the math and figure out how much extra monthly you need to pay on the loan to pay it off in 25 years instead of 30, then set it to automatically pay each month."

4. Choose a mortgage with no closing costs.

Again, refinancing your mortgage is basically getting a new loan to replace the old one. You will therefore have to pay closing costs to finalize the transaction. Typically, closing costs range from 2% to 5% of the loan amount. If you get a $200,000 loan, for example, you can expect to pay between $4,000 and $10,000.

Fortunately, there are no mortgages with closing costs. But, like most things in life, there is a catch. In order to make up for the money they lost upfront, the lender...