5 mortgage refinancing mistakes to avoid

Refinancing your mortgage can help you save a considerable amount of money over the long payoff period of your home. But as with any financial product, you'll get the most from it by knowing how to do it wisely. Making a costly mistake can even negate some of the savings you're hoping to achieve.

Fortunately, it's easy to steer clear of unnecessary losses by knowing what these mistakes are and how to avoid them.

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5 mortgage refinancing mistakes to avoid

Whether you're refinancing for a lower interest rate, a shorter loan term or to tap into your home's equity, don't make these common mistakes.

1. Not checking your credit report before applying

Your credit score is one of the most important factors lenders consider when evaluating your mortgage refinance application. If your credit report has errors or outdated information, it could hurt your chances of getting approved or result in a higher interest rate.

Before refinancing your mortgage, request a free credit report from each of the three major credit bureaus and review them carefully for accuracy. If you find any errors, contact the credit bureau immediately to dispute them.

If your report is accurate, but your credit score is low, you may want to take some time to improve it before applying for a mortgage refinance. Many lenders require a score of 620 or higher.

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2. Not shopping around

Just because you currently have a mortgage with your bank, that doesn't mean they'll offer you the best rate on a mortgage refinance. To ensure that you get the most competitive offer, get quotes from multiple lenders. Carefully compare the rates, fees and terms of each loan option before making a decision.

A seemingly small difference can add up to significant savings over the life of your loan.

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3. Focusing only on interest rates

Many homeowners focus solely on obtaining the lowest interest rate possible when refinancing their mortgages, but it's essential to consider the long-term costs and savings, too.

A mortgage with a lower interest rate and a shorter term may have higher monthly payments. In contrast, a mortgage with a higher interest rate and a more extended term may have lower monthly payments but higher overall costs due to paying interest over a longer period.

Make sure you weigh all the factors — including your budget, financial goals and overall loan costs — before deciding which refinancing option is the best fit for you.

4. Not considering how long you'll stay in the home

Before deciding to refinance your mortgage, consider how long you plan on staying in your home. There's typically a break-even point where it's cost-effective to refinance. You can roughly estimate this point for different mortgage options by dividing the total loan costs by how much you'll save each month over the course of repayment.

If you move out before this point, you may not save as much as you planned or even end up losing money. So, it's essential to consider the length of your stay in the property when considering refinancing.

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5. Not factoring in closing costs

Closing costs are expenses you incur when refinancing your mortgage, such as loan origination fees, appraisal fees and title insurance. These fees can add up to thousands of dollars, depending on the size of your mortgage. If you don't factor these costs into your calculations, your refinance may not save you as much as you'd like.

The bottom line

Refinancing your mortgage can be a great financial move, but it's important to avoid mistakes that can cost you a considerable amount of money.

Get the most from your mortgage refinance, by checking your credit report before applying, shopping around for the best rates, weighing short-term savings against long-term costs, considering how long you'll stay in the home and not overlooking closing costs. When you avoid these common pitfalls, you'll be better prepared to make the smart decision that meets both your immediate and future financial goals.