10 Mistakes To Avoid When You Refinance a Home Loan



With mortgage rates still hovering around historical lows, refinancing is a way to save hundreds of dollars per month. According to a Zillow survey released in June 2021, almost half of the respondents who refinanced within the past year slashed their mortgage payments by at least $300.

Read: Why It’s Still Worth Refinancing Your Mortgage Now — Except in This Situation
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According to the survey, 89% of homeowners who refinanced their home in the past year claimed low interest rates were the motivating factor, 74% said they chose to refinance to cut monthly expenses and approximately one-third of respondents refinanced to pay off debt.

Whatever your reason for refinancing, know that not all mortgage refinances are created equal. And if you’re not careful, you can make a mistake that will cost you. Here are 10 pitfalls to avoid when you refinance a home loan.

Last updated: Oct. 13, 2021 
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Not Knowing What Your Credit Score Is

Matt Stevens, home financing expert and CEO of The Mortgage Genie, said that it’s not uncommon to find that a customer did not realize that their score changed since they received their initial mortgage loan.

“One of the main steps when buying a house is to make sure that your credit score is spot on,” he said. “A higher score means your application will more likely be accepted, and lenders will offer you better rates because you are low risk — and this applies to home refinance too.”

Helpful: Tips To Get Your Mortgage Payments as Low as Possible

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Not Talking To an Experienced Loan Officer

“There are a lot of internet/call center lenders out there that do offer good rates,” said Tony Grech, senior mortgage loan originator at Luxury Mortgage Corp. “But you are just a number to them and they are often simply there to take orders rather than advise you on the best program options you qualify for. You want a 30- year fixed? Sure, Mr. Customer, here you go. Now on to the next one. But a true professional is going to take the time to get to know you and your unique situation, your goals etc, and is going to provide custom recommendations. They are going to get into the discussion and comparison of interest rates and the costs associated with getting each rate. They are going to explain the pros and cons of a 30-year loan vs. a 20 or 15, and are going to educate you so that you can make the best decision for you.”

Helpful: How Interest Rates Affect Your Wallet and the Bigger Economic Picture 

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Not Choosing the Right Mortgage Product

“In our current environment, especially, it is good to make sure you are choosing the correct and most efficient mortgage product,” said D. Shane Whitteker, owner and chief broker of Principle Home Mortgage. “There are a lot of people that have used an FHA mortgage in the past that may qualify for a conventional loan currently, and possibly remove mortgage insurance or drastically improve the mortgage insurance terms. VA is a great option as well and I find that some veterans end up using different loan programs that are not as beneficial to the veteran. It is also good to consider streamline refinance options that are offered by FHA and VA. The FHA program is called a “streamline” refinance. The VA program is called an “IRRRL” this stands for interest rate reduction refinance loan.”

Find Out: How Much Debt Americans Have at Every Age

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Not Shopping Around

“The most common mistake I see for borrowers who are eager to refinance their home loan [is that] they stick with the bank they are familiar with,” said Leonard Ang, CEO, iPropertyManagement.

“Although you may be comfortable with banks and terms you are familiar with, it can pay big time to shop around for other lenders whose rates may be even better, thus saving you thousands of dollars down the line. Do not be afraid to browse for lenders until you are confident and comfortable with your choice.”

Read: Strategies To Pay Off Your Mortgage Earlier

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Refinancing for the Same Length of Time as Your Previous Loan

“One of the biggest mistakes I see homeowners making is trying to refinance for the same length of time,” said John Li, co-founder and CTO of the financial lending company Fig Loans. “If you initially financed for a 25-year mortgage, you shouldn’t refinance 10 years later for another 25-year mortgage — you’ll end up paying off your mortgage well into your golden years, and paying far more in interest than you should. Instead, look to refinance your mortgage at a better rate for a shorter-term loan that closely resembles the remaining time on your mortgage.”

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Ignoring How Long You Plan To Live in the Home

“Interest rates are near historic lows but that doesn’t automatically mean it is a good idea for everyone to refinance their mortgage,” said Brian Walsh, senior manager and CFP at SoFi. “You should do a break-even analysis to make sure refinancing is the right move. This can be as simple as dividing your total closing costs associated with the refinancing by your reduction in monthly payments. Then compare that breakeven period with how long you plan to live in the home. If you plan on selling the home before your break-even point, then it might not be the best idea.”

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Getting Other Loans While Refinancing

“Do not apply for other loans, like credit cards, cars, boats, etc.,” said Khari Washington, broker and owner of 1st United Realty & Mortgage. “Applying for other loans can lower your credit score and also makes mortgage underwriters nervous. Lenders recheck your credit before closing a loan, and they will catch other loans. Those loans could get your deal denied. Wait till your loan is closed.”

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Going With a Lender Who Underestimates Your Taxes and Insurance Costs

Washington said sometimes lenders do this to make your closing costs look lower.

“When looking at an estimate, do not include your taxes and insurance in your calculations,” he said. “No matter what lender you use, those fees will be the same, even if one lender wants to quote them for less to make their deal look better.”

Save More: How To Save Money on All Your Monthly Expenses and Bills


Focusing on the Rate and Not the Closing Costs

“Lenders may quote a low rate by raising the closing costs for a loan,” Washington said. “If a lender beats a quote you received from another lender by raising the closing costs, the loan might not be cheaper. If lender A quotes 3% with no closing costs and lender B quoted 2.875% with $6,000 in closing costs, you are paying a lot of money for a .125% difference in rate. In addition, lender A might have given a 2.875% interest rate for less closing costs than lender B. Always look at how much you have to pay for a rate.”

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Using Home Equity Too Freely

“It can be tempting to use home equity to tackle home improvement projects or even buy big ticket items that you have always wanted,” Walsh said. “Before succumbing to that temptation, think about the long-term impact of tapping into your home equity. You should still evaluate the ROI of home improvement projects even if you are using home equity.”

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