4 mortgage refinancing mistakes that can cost you money

With mortgages rates in decline, millions of Americans are mulling over a mortgage refinancing deal. (iStock)

Uncle Sam is working overtime to get Americans to borrow money – and for financial institutions to lend it.

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Case in point – refinance rates are dropping. Thirty-year fixed-rate home mortgage rates are down to 3.25-to-3.50 percent after the Federal Reserve lowered its benchmark interest rate, as of the second week of May. That’s a big deal if you want to refinance your mortgage and get a lower interest rate (in turn, lowering your monthly payments).

Why? While rates are low, mortgage holders can save a ton of cash by refinancing their current mortgage. With Credible, you can find out just how much you could save on interest by comparing multiple lender offers at once.

MORTGAGE RATES HIT A NEW RECORD LOW – HOW REFINANCING NOW COULD SAVE YOU MORE MONEY

Take a homeowner with $250,000 remaining on their 30-year fixed home mortgage loan with an interest rate of 5.5 percent on a home valued at $325,000. If the homeowner has a good credit score (a 720 FICO credit score or higher), he or she can qualify for a newly refinanced home loan rate of 3.5 percent, and can easily save over $200 on their monthly mortgage payment.

In this low-interest rate environment, mortgage refinancing deals from mortgage lenders are easier to come by.

WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW

Since the emergency rate cut in March, the Federal Reserve has kept the federal funds rate at near zero, bringing home mortgage rates down in the process. With recent moves, many borrowers are likely considering refinancing. But there are some elements they should be aware of before proceeding.

Mortgage refinancing mistakes to avoid

In a word, refinancing your mortgage means you replace your current mortgage with a new one. Your new mortgage pays off your old one, and you’re then responsible for paying off your new mortgage.

Sounds easy enough, right? But landmines abound throughout your mortgage refinancing process. The trick is recognizing the potential refinancing mistakes along the way and avoiding them altogether.

What are the biggest mistakes to avoid during a mortgage refinancing deal? These budget-busters certainly qualify.

1. Not shopping around to find the best rates and fees

You wouldn’t buy a pair of shoes online without first shopping around for the best price but consumers often make the biggest financial decisions of their lives by going with the very first person who gets back to them.

Use Credible to shop for the most competitive rates and save more on your monthly payments.

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2. Not calculating the total cost of a refinancing deal

“People don’t calculate the total cost but only consider the interest rate,” said Earl Knecht, vice president and CFO of Napa Valley Wealth Management.

Given rates and fees plus additional costs, refinancing to a lower rate might actually cost you, Knecht said.

“Before signing anything, look at the fine print and the actual contracts,” he noted. “Compare the terms to your original loan docs, including the fees paid to the lender, estate fees, and all miscellaneous and additional costs.”

3. Getting involved in a mortgage loan forbearance

Don’t put your mortgage on forbearance – that will cost you when you try to refinance your home loan.

“Some individual banks are offering a forbearance, allowing you to skip two or three payments for 60-90 days,” Knecht noted. “At the end of that time period, you’ll owe the outstanding balance in full. That’s a bit risky if your income is questionable now, and it’s akin to telling the bank, 'We can’t pay the amount we previously agreed to pay.'"

“That’s not a good look for a refi deal,” he added.

4. Not getting your credit in order

Don’t take out a new credit card or loan if you’re considering a refi.

“A new credit application could negatively impact your score and your refi rate,” Knecht said. “Also, know your credit score before you apply. Credit-slip surprises can derail a refinance deal.”