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There are many benefits that you can reap from mortgage refinancing. But it only takes just a little lapse of judgement and you could make a very costly mistake by placing your family’s home at risk. I have listed 5 costly mistakes that people may make when refinancing their mortgage:

#1: Interest rate not locked-in

Remember that interest rates are very unstable. While your loan is being processed, your rate can change a few times. The moment you find an interest rate that satisfies you, ask your lender to lock it in, otherwise you might be given a different rate from what you have expected in the beginning. Have your lending put it in writing and when the loan processing is done, confirm it. Usually, lenders will not lock in your interest rate unless you request it.

#2: Not shopping around

If you haven’t already known, there are hundreds of mortgage companies out there. Each company is unique and although they offer the same service, there are a lot of things to compare amongst them. It is highly recommended that you shop around first to find the best deal that you can get. I have written an article on “How to Shop For A Mortgage Loan“, where you find what to consider and compare when shopping for a loan.

#3: Refinancing too often

It is true that refinancing is a good way to take advantage of a lower rate and also save money on monthly fees. But if you take it every time the rate drops a few points, you may end up paying much more in the long run because terminating your loan and buying a new one involve fees. Closing costs can be as much as thousands of dollars and doing it over and over again, you will definitely defeat the purpose of refinancing.

#4: Your break-even point not calculated

Homeowners usually fail to recognize that there is always a fee to pay to terminate their existing loan and getting a new mortgage loan. Unless you calculate your break even point, you will more likely lose money than save it by refinancing.

Here is how to calculate your break-even point:

If refinancing your mortgage saves you $200 per month and your closing cost is $2000 (one time fee), simply dived the closing cost by your monthly savings and you will get the number of months it takes for you to reach your break-even point.

In the above example you calculate $2000/$200 = 10 months which is the number of months that it takes you to recoup the cost of refinancing. In other words, before you can actually realize your savings, the first 10 months of savings after refinancing is paid towards the closing cost.

Think twice before refinancing too many times. Always know first if you have recoup the cost of your previous loan. By knowing when you will reach your break-even point, you will be able to determine how long you will have to stay in your home before starting to actually get savings from refinancing.

#5: Refinancing just for the heck of it

Too many homeowners think the time to refinance and refinance again is when the rate drops and drops again. This is wrong! Whether it is the right time to refinance your home or not depends on many factors, and not just the interest rate. If you are planning to move out of your home in less than 2 years AFTER you reach the break even point, never refinance! So if it takes 10 months for you to break even, you should be planning to stay in your house for at least 2 years and 10 months.

Here are a few reasons for you not to refinance:

- if you have only a few years left to pay for your home
- if you have been paying for your current loan for many years
- if you have a bad credit score
- if the current market value of your home is low
- if you have already used up all the equity of your home

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