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Mortgage rates hit historic lows in 2020, and that led to a refinancing boom. Indeed, mortgage refinancing activity reached its highest annual total since 2003, according to data from Freddie Mac. If you didn’t refinance last year and think you may want to, there’s good news: You can still find some mortgage refi rates under 3%. (Compare today’s best refi rates here).
But refinancing is not always the right move for you, and it’s easy to make a mistake. (Find the best mortgage refinance rates in your area here.) We asked mortgage and finance experts to spell out the top mistakes people make when refinancing so you can avoid them.
Mistake No. 1: You didn’t check your credit report
Greg McBride, chief financial analyst at Bankrate, says failing to check your credit reports for possible errors is a mistake that happens even before applying for the mortgage. “Incorrect information of a derogatory nature can torpedo your credit score and your chances of getting approved for that rock-bottom rate,” says McBride.
Mistake No. 2: You ignored factors beyond the interest rate
Yes, the interest rate is very important, but Brian Walsh, senior manager of planning and certified financial planner at SoFi, says people seem to get fixated on the interest rate to the detriment of looking at other factors. “A 3% interest rate from one lender is not the same thing as a 3% rate at another lender. You should also consider the points, fees and closing costs associated with each of your options,” says Walsh. (Find the best mortgage refinance options for you here.)
Mistake No. 3: You didn’t get quotes from multiple lenders
“Shopping around can yield thousands of dollars in savings. A difference of a quarter-percentage point on a $300,000 mortgage is a savings of nearly $500 per year in interest. Shopping around can also save big on closing costs, too,” says McBride. (You can compare today’s best refi rates here).
Mistake No. 4: You didn’t look into closing costs
Mistake No. 6: You didn’t take into account your current and expected income
George Ratiu, senior economist at Realtor.com, says an important consideration in the refinancing process is your current and expected income. Indeed if you expect your income to decrease — say your spouse hopes to say home to take care of the children, or you will soon retire — in the future, it may be especially important to refinance. “Lowering your monthly costs through a refinance would improve your cash flow,” says Ratiu.
Mistake No. 6: You neglected to select a shorter repayment period
“When refinancing a mortgage, you can save money not only by benefitting from a lower rate, but also by choosing shorter repayment periods. If you’re five years into your 30-year mortgage which may carry a 4.5% rate, you may lower not only your monthly payment if you switch to 2.98%, but also your total interest by switching to a 20-year loan,” says Ratiu. (Find the best 15-year mortgage refinance rates here.)
Mistake No. 7: You ignored how long you plan to live in the home
Interest rates are near historic lows but that doesn’t automatically mean it’s a good idea for everyone to refinance their mortgage. “You should do a breakeven 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,” says Walsh. And Ratiu says, “If you think you may move in the next 2 or 3 years, you may be better off waiting.”