You have good credit and equity in your home, and refinancing rates are at an all-time low. You could be in a great position to refinance and save on that monthly mortgage -- unless you make some costly mistakes during the process. If you're truly ready to refinance, you'll need to act fast to lock in that rate. Understand what the process entails and exactly how much you will be saving each month.
Here are some of the top refinancing mistakes to avoid.
Not shopping around
When rates start to drop, remember that lenders will be competing for your business. While you may prefer the financial institution that you've been banking with for years, there's a chance that another lender can give you an unbeatable deal on that refinancing package -- especially if you have excellent credit. Don't be afraid to shop around so you can compare total costs and get the best possible deal. Find out who might be able to waive some of the fees and closing costs, which lenders have the best reputation, and who is giving you the highest level of customer service.
You may have very good credit and eligibility to borrow more than just the base loan amount. However, those additional funds come at a price because you will be paying interest on the entire loan balance. According to Vanguard, borrowing more might make sense if the extra funds will cover the cost of permanent improvements to your home or pay off a high-interest-rate second mortgage or home equity line of credit. Borrowing more won't make sense if you're paying more than 28 percent of your income in mortgage payments; consolidating unsecured debt; using the money to buy depreciating assets or short-lived expenses, such as a vacation or wedding.
Forgetting to factor in closing costs
Almost every refinancing deal will incur closing costs and fees. Unless your lender has agreed to waive all of these costs, you need to add them to the total cost of the deal to determine if this really is a good deal. Sometimes locking in a low rate might not lead to significant savings after you factor in closing costs and refinancing fees.
Overlooking benefits of shorter-term loans
According to the results of the 2011 LendingTree Lender Marketplace Survey, many borrowers make the mistake of refinancing into a long-term loan like a 30-year fixed mortgage instead of shorter-term loans. Don't overlook the benefits of a 15-year or 20-year fixed-rate loan, which would end up reducing interest costs. As long as you can afford it, a shorter-term loan would help you own your home that much sooner.