The Do’s and Don’ts of Mortgage Refinancing


Refinancing your mortgage is a great way to take advantage of low interest rates, change your loan term or use the equity in your home to pay for milestone events, college tuition, or renovations. Refinancing involves paying off your existing home loan and replacing it with a new one. 


Reasons for Mortgage Refinancing

Mortgage refinancing offers many financial benefits and can be a great option if you plan to stay in your home for several years. Some of the reasons you should consider refinancing your mortgage include: 

  • Reducing your monthly payments
  • Accessing your home’s equity
  • Adjusting the loan term from 30 to 15 years for a quicker payoff
  • Eliminating FHA mortgage insurance payments
  • Switching from an adjustable-rate loan to a fixed-rate loan

While there are advantages to mortgage refinancing, it’s not necessarily the right choice for everybody. Consider the interest rate on your current loan; if you have the opportunity to reduce that rate by at least 1% and have been paying your existing mortgage for six to seven months, refinancing may be a good option for you. 

Refinancing takes a similar amount of time as closing on a home during a traditional sale (between 45 to 60 days). The cost of refinancing depends on whether you’re breaking your mortgage contract early, which can result in additional fees and if you’re switching lenders, in which case you might have to pay a mortgage discharge fee. 

Legal fees, appraisal and inspection fees, and a mortgage registration fee are all expenses you must account for when refinancing your mortgage loan. 

Find out how to approach mortgage refinancing strategically and which mistakes to avoid along the way. 


The Do’s of Mortgage Refinancing 

Here are the must-do’s when refinancing your mortgage:

Improve your credit score
Consider switching to a fixed-rate
Make use of your home’s equity
Focus solely on the mortgage rate
Take out too much equity on your home
Refinance to pay off unsecured debts

1. Improve your credit score

Improving your credit score can help when it comes to negotiating interest rates and loan terms. Before applying for a mortgage refinance, check your credit report. You can get a free copy of your credit report once every 12 months through one of the three major credit bureaus, Experian, TransUnion, and Equifax.

Confirm the information in the report is accurate and look for potential areas of improvement, such as reducing your debt-to-income (DTI) ratio by increasing your limit on lines of credit or paying off existing debt. Dispute any mistakes in the report that could be negatively affecting your score. 

You pose a lesser risk to a mortgage lender with a clean credit history and a higher credit score. Lenders can offer you lower interest rates when they view you as less of a risk. 


2. Consider switching to a fixed-rate 

Adjustable-rate mortgages can be beneficial if you plan to stay in your home for a short period rather than permanently. However, when you see yourself living in a property for five years or longer, you can improve your financial stability by switching to a fixed-rate mortgage.

This loan repayment model eliminates the risk of your interest rate drastically increasing within the agreed-upon period, keeping your mortgage payments predictable. If you’re getting a lower interest rate on your refinanced mortgage, switching to a fixed-rate allows you to lock in that amount for the life of the loan.  


3. Make use of your home’s equity

Cash-out refinancing allows you to tap into your home’s equity. This is the difference between your home’s current market value and the amount you still owe. Mortgage lenders permit you to take some equity in the form of cash when refinancing, though you typically must maintain 20% equity on the home

The exception to this rule is if the Department of Veteran Affairs backs your mortgage. You can withdraw 100% of the equity on your home with a VA cash-out refinance


The Don’ts of Mortgage Refinancing 

When refinancing your home, there are a few common mistakes to avoid. Educate yourself about mortgage refinancing to minimize your financial risk and ensure you’re setting yourself up for long-term success. 


1. Focus solely on the mortgage rate

Focusing exclusively on the mortgage interest rate you’re getting can result in you selecting the wrong lender or even refinancing when it’s not in your best financial interests. This can include not staying in your home long enough to make up for the refinancing fees you pay and start saving money. 

Refinancing may also not make sense if you can’t afford the closing costs and have to build them into your mortgage. 


2. Take out too much equity on your home

Tapping into equity, while helpful at times, comes with several risks. In a home equity loan, your house is the collateral, meaning if you cannot make your payments, the lender will repossess the property. 

Tapping into your equity increases the total cost of your mortgage, meaning you may end up owing more than your home is worth if the market takes a downturn. Ensure you understand the risks associated with cash-out refinancing and borrowing against your mortgage loan before taking advantage of your home’s equity. 


3. Refinance to pay off unsecured debts

Avoid refinancing your home to pay off unsecured debts, like credit cards. This process converts your unsecured debts into secure debts, which may be worse for you in the long term. 

The risk of converting an unsecured debt like your credit cards into secured debt as part of your mortgage is that there is no collateral attached with your credit card debt. The credit card company might charge you higher interest, but they have nothing they can take from you if you fail to repay the debt beyond that. 

However, if your unsecured debts are converted as part of your mortgage and you fail to repay the amount, your house becomes the collateral. 


4. Accept your first refinancing offer

A fraction of a percent can make a tremendous long-term difference in total mortgage repayments. You can save thousands of dollars on a real estate mortgage by shopping around and exploring rates through various loan officers. Consider rates, terms, and associated fees among different lenders and find a deal that best fits your financial needs. 


Successfully Refinance Your Mortgage 

Whether you’re refinancing to lower interest rates, shorten your loan term, or tap into your home’s equity, avoid the common pitfalls of mortgage refinancing. By improving your credit score and understanding the value of your home’s equity, you can renegotiate your mortgage loan and save yourself money in the long run. 

At Finance is us, we provide impartial information and advice to homeowners. Browse our blog for more information on mortgages, loans, investing, banking, and insurance. Our goal is to help you make more informed decisions regarding your finances. 


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.

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