Even though it's always nice to have a lower monthly mortgage payment, don't be fooled by a slightly lower mortgage rate. If you don't watch out when you're thinking about refinancing your mortgage, you could end up spending more than you save in monthly payments and not even know it. (Even with loans that are advertised as having "no costs.") There is more to refinancing a home loan than meets the eye. Before you do something you can't get out of, you should talk to someone who knows about mortgages.
First mistake: waiting for interest rates to go down.
Mortgage rates are known to change all the time. No one can bet with enough accuracy on mortgage rates to win every time. If the rates are good, you might want to refinance. If you do it right and rates go down again in the future, you can always refinance again. You can always switch mortgage brokers if rates go down a lot before you close on the loan. If interest rates go up, you'll be glad you locked in that first rate.
Mistake #2: Not talking to enough mortgage bankers or brokers in the area.
Online mortgage shopping sites like E-loan, Lending Tree, and others are great, but be careful! They are national sites where you can compare mortgages. That might sound good because mortgage lenders from all over the country will be competing for your business, but be careful. Any lender who isn't from your home state won't know how things work there, and that could cost you in many ways. It might not only cost you that lower interest rate, but depending on your other circumstances, it could also cause you to miss that window of opportunity.
Third mistake: not seeing the big picture.
If you've been paying your mortgage for a few years, the amount you save each month by refinancing might not be as much as you think. Most of the time, it costs a lot more than people think! In other words, if you've had your mortgage loan for 10 years, refinancing it would mean starting over on paying off the debt. Obviously, saving money by refinancing your home loan would be great, but if you refinance a loan you've been paying on for 10 years, you'll be paying it off for another 10 years! That could be very painful. It may seem great that you're lowering your $1200 monthly payment by $100, but when you add up the extra 120 payments of $1100 you'll have to make after refinancing, you'll find that your "$100 monthly savings" will actually cost you an extra $108,000 over the life of the loan. Over 30 years, $1100 times 360 payments is $108,000 more than $1200 times 240 payments.
Before you take out a new loan that could cost you thousands or even tens of thousands of dollars over the life of the loan, make sure your mortgage broker gives you a "good faith estimate" and a "Truth in Lending statement." Get your mortgage broker to explain not only how much your monthly payment will be, but also how your new loan balance will compare to your old loan balance, what your new interest rate will be, and how many years you will add to your repayment schedule if you decide to refinance.
