On the surface, refinancing can seem like a simple proposition: Using today's low mortgage rates, you apply new and more favorable terms to the money you owe on your home, which in turn reduces your monthly payment and the finance charges you'll pay over the life of the loan. Easy, right?
Unfortunately, it's not quite that basic. If you are eager to start the refinance process on your mortgage, you need to understand that refinancing often requires the same process as applying for your first mortgage loan. In most cases, a lender will assess your refinance eligibility you based on your credit, income, assets and the value of your home.
So to increase your chances of a successful refinance, avoid these common refinancing mistakes.
1. Forgetting to comparison shop
While you should certainly check with your current mortgage lender about refinancing options, you should also take the time to compare mortgage rates from two or three other lenders. Don't just look at interest rates that are advertised -- contact several mortgage lenders and get mortgage offers in writing based on your individual circumstances.
Also compare the fees of different lenders to see if you can save money by choosing one over another. Then take these offers back to your current lender to see if you can negotiate a better deal -- or start the refinance process with a new lender.
2. Ignoring your home's value
Depending on when you last had your home appraised, you may not be aware of what your home is worth in today's market. To get a rough estimate, you can browse online home listings for similar properties or contact a local realtor who may be willing to offer some insight on your home's worth.
If your home has dropped too much in value, you may have to request refinancing options under special government programs or consider bringing cash to the settlement table to pay down your mortgage loan balance a bit -- the latter of which may hurt the appeal of a refinance.
3. Only considering another 30-year fixed-rate mortgage
This may or may not be a mistake, depending on your goals and individual circumstances. If you plan to stay in your home for the long-term and your goal is to reduce your monthly payments, a 30-year home loan may be the right choice. But if you want to pay off your mortgage faster or know for certain that you will sell your home in a few years, a shorter loan term such as 10-, 15- or 20-year term may be a better option.
For some borrowers, an adjustable-rate mortgage (ARM) that starts out with a fixed-rate for five or seven years may even be suitable. Be sure to discuss all of your mortgage loan term options with a lender to see which one meets your needs best.
4. Neglecting your credit
If you haven't viewed your credit report recently and don't know what your credit score is, you need to check on this before you apply for refinancing. Many lenders have tightened their credit standards, and you may need a credit score of 740 or above to be offered the best mortgage rates. If your credit score has slipped, you may want to look into an FHA loan, since many lenders will accept borrowers with a credit score of 640 or above for an FHA mortgage loan provided they meet other FHA requirements.
Don't make any new purchases on credit or apply for additional credit between the time your loan is approved and the closing on your refinance, though, because this could lower your credit score and delay or derail your refinance.
The refinancing process could take several months from start to finish, so be sure to stay current on your mortgage and other bills as you do your research and wait for your loan approval. The more carefully you prepare for a refinance, the better your chances it will be a success.