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9 Big Refinance Mistakes

Article Summary: These refinancing tips can help save you thousands of dollars on your next mortgage.

Your mortgage broker “locks in” your final interest rate with the lender. You can request a copy of this rate-lock prior to having to sign the loan documents. That way you know which interest rate to expect, and you won’t be hit by any last minute surprises.

4. Wrong loan type

There are many different loan options out there. Make sure these are explained to you thoroughly. This is your chance to get free advice from multiple sources. For some people a 30 year fixed loan is appropriate, and for some people an interest-only loan with lower payments may be better.

5. High prepay

Some loans come with a prepayment penalty. Find out how long this payment penalty period exists for, and how much it will cost. If you plan on leaving your house in a year, and your prepayment penalty is for 2 years, you will end up paying that prepayment penalty in the future. Sometimes accepting a prepayment penalty for the short term can lead to a lower rate. If you accept a prepayment penalty of one year for an interest rate, but reasonably expect to be in the property for another five years, then this is something to consider.

6. Paying a prepay

Your current loan may have a prepayment penalty. Some lenders waive their prepayment penalty if you refinance with them again. Sometimes this prepayment penalty waiver is prorated from your old loan. For example, if you have one year of a prepayment penalty left on a three year prepayment penalty, then your new loan with the same lender will carry over that one year prepayment penalty.

7. Fixed for long time frame

If you plan on keeping the house for 10 years and get a loan that is fixed only for 5 years, you are exposing yourself to the risk of a higher interest rate in 5 years. Interest rates may be lower or higher at that time, but if you have a 30 year fixed loan you don’t have to worry about that for 30 years.

8. Hard/soft prepay

A hard prepayment penalty is triggered if the loan is refinanced or the house is sold. A soft prepayment penalty is only triggered by a refinance, so if you sell the house then there is no prepayment penalty. A soft prepayment penalty gives you more options.

9. Borrow too much

There are lots of aggressive loan options and lenders out there. It can be relatively easy and tempting to cash out a lot of equity. Make sure you can afford the new payment, and that the cash you are taking out is for reasonable purposes.

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Ben A

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