Refinancing? Avoid these five blunders

Before you jump on the refinancing bandwagon, do your research. Bypassing these refinancing mistakes will save you a lot of money — not to mention headaches — down the line.

Mistake #1: Paying too much in closing costs
Closing costs vary depending on which lender you choose. If you're not careful, you could wind up spending more than you should. You don't have to stick with your current lender when you refinance your mortgage, so talk to a number of different lenders to make sure you get the best rate. Check out a big national bank, a mortgage broker, a smaller local or regional bank and a credit union. You should also check out online lending websites, but stick with bigger names to avoid getting scammed.

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Mistake #2: Not understanding what makes a "home-run refinance."
Just because you're able to refinance doesn't mean you should. To be sure it's the best move you can make, consider whether your refinance does at least two of the following: lowers your interest rate, lowers your monthly payment or shortens the loan term. If you're able to do at least two of these with your refinance, it's probably worth it. And if it's doing all three, plus managing your closing costs, you could be looking at what I call a home-run refinance.

Mistake #3: Being afraid of a shorter loan term.
You're in a 30-year loan term now, but that doesn't mean you need to lock in your next loan for another 30 years. This is especially true if you've already paid off seven or eight years of your loan, since stretching the new loan out over 30 years will actually cost you more money. Instead, consider a 15-year loan or even a 10-year fixed-rate loan. While the shorter term might seem scary, and it could even boost your monthly payments slightly, you could wind up saving yourself thousands of dollars in interest and mortgage payments over the life of the loan.
 
Mistake #4: Ignoring prepayment penalties.
Prepayment penalties are due when you pay off your loan in a shorter time period than the one stipulated by your lender. Since refinancing pays off your first loan and rolls you into a new one, you could incur prepayment penalties on your original loan upon refinancing. Be sure to read the terms of your loan and call your lender if you have any questions.

Also, while they are extremely uncommon today because most new mortgages are backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), ask if there are any prepayment penalties in the new loan you're considering. If you lock into a new 30-year loan assuming you'll pay it off in 10 years, you may end up owing the lender more in prepayment penalties than you saved in the refinance. In this case, you're better off going with a shorter loan term.

Mistake #5: Re-re-re-refinancing.
It's great to take advantage of low interest rates with a refinance, and it's possible that today's low rates could go even lower. But that doesn't mean you should refinance every time rates drop. Instead, when rates are lower than the one you're currently locked into, calculate how long it will take you to benefit from the savings and refinance when it makes sense for you. You'll incur more in closing costs than savings if you refinance countless times over the life of your loan, so lock into a rate you're comfortable with and start paying it down.

Remember, mortgage interest rates are at 50-year lows. If you wait to refinance thinking that you'll get a better deal next year, you might be surprised to see interest rates move off of their lows and start climbing in the wrong direction. Ilyce Glink

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