Mortgage Refinance Do's and Don'ts

It's important to know the mortgage refinance do's and don'ts before you apply for a new loan to pay off your existing mortgage.

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Mortgage refinancing is a common practice where an existing mortgage loan is paid off by a new loan, usually with a lower interest rate or more favorable payment terms. Homeowners refinance their mortgage loans when it is possible to get a better deal or when they need to access some of their home's equity to get cash or consolidate debt. Most mortgage lenders offer a variety of refinancing options for applicants.

Refinancing a mortgage loan can be a great way to save substantial money in the long run, but it can also lead to dire financial problems in worst case scenarios.

Like any other major financial obligation, a mortgage refinance should be approached with caution and only after extensive research has been done. You want to make sure you are making the best financial decision without putting your home at unnecessary risk.

Refinancing can be a great way to lower your interest rate or to consolidate additional debts into a potentially tax deductible mortgage loan.

• Do shop around. Never assume that your current mortgage company has the best interest rates available. You may be able to find a better mortgage loan through a different lender. A little comparison shopping can save you a lot of money in the long run.
• Do look for a substantial interest rate reduction. It is not a good idea to refinance your mortgage loan unless you are able to save at least one or two percentage points. Remember: You will wind up paying closing costs all over again with a mortgage refinance, so you want to make sure that it is worth your while.
• Do close accounts you consolidate with a refinance. If you consolidate debt with your mortgage refinance, make sure that you close the accounts you pay off with the proceeds from your cash-out refinance. If you don't take this crucial step you might be tempted to start using the accounts again and may wind up in more debt than before the refinance.
• Do read every document you sign. Review every single document that is presented to you to sign for the refinance. Keep in mind that a refinance is a new mortgage loan, so you should be as detailed and inquisitive as you were when you obtained your original mortgage loan.

If you have a mortgage loan that features an interest rate higher than rates currently being offered by lenders, it may be time to look into refinancing.

Refinancing should never be thought of as an easy way to get money to waste, nor should it be entered into without complete understanding of the terms of the new loan.

• Don't refinance if you are planning on moving soon. The closing costs you will pay will outweigh any financial benefit you get from a reduction in interest rates. If you know you will sell the home within a year or two, refinancing may not be worth it.
• Don't forget about prepayment penalties. Before you decide to refinance your mortgage, have a look at your original loan documents. If your existing loan features a hefty prepayment penalty, it may be more financially advantageous to keep your loan as it is.
• Don't max out your equity. Home values are not nearly as stable as they once were, and for this reason maxing out the equity in your home can be a big gamble. Unless you absolutely need the money for a necessary expense, don't borrow the maximum allowable amount.
• Don't discount modification. If you are looking to refinance your loan because you are having trouble keeping up with your mortgage payments, you may want to consider a loan modification instead of a refinance. This can be a quick and easy way to change the terms of your loan without applying for a new one.

Keep in mind that just because a mortgage lender is willing to lend you a large amount of money for a cash-out refinance, it does not necessarily mean that doing so is in your best interest. Pay close attention to the mortgage refinance do's and don'ts before making a decision.

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