With mortgage interest rates as low as they are right now, homeowners can save a lot of money by refinancing their home loan. But it's not as simple as finding a good interest rate and jumping on it - there's a lot more to it than that.

With mortgage interest rates as low as they are right now, homeowners can save a lot of money by refinancing their home loan. But it's not as simple as finding a good interest rate and jumping on it - there's a lot more to it than that.

Here are 10 mistakes that homeowners frequently make when refinancing a home mortgage:

1 - Not shopping around

It's amazing how many borrowers simply find a lender offering what appears to be a good rate, either in the newspaper or online, contacts them and applies for a loan without checking out the competition. Shaving one-eighth or one-quarter of a percent off your interest rate can save tens of thousands of dollars over the life of a typical loan.

Related to this is assuming that you need to refinance with your existing lender. Not true, unless you're trying to take advantage of a government-backed program that requires it. Some people think they'll save on documentation and other fees by staying with the same lender, on the assumption they already submitted all that information when they took out their original home loan. But a refinance is an entirely new mortgage, so all those documents need to be submitted again.

2- Focusing only on the interest rate

Although the interest rate is the primary factor in determining what your mortgage will eventually cost you, it's far from the only one. Closing fees vary widely from lender to lender, and a seemingly low rate is sometimes used as a come-on to a loan with abnormally high fees. Be sure to inquire about such things as the loan origination fees, points, credit reports and all other fees before applying for the loan. These aren't finalized until you receive the Good Faith Estimate after you apply, but any major changes at that point are a warning sign something's amiss.

One way to compare fees is to ask what kind of rate you could get if the loan was packaged as a "no cost" refinance - that is, the fees are bundled into the cost of the loan itself, typically by increasing the principal or raising the interest rate. You may not actually want to refinance that way, but having the figures can make it easier to compare costs among several loans.

3 - Not reviewing the Good Faith Estimate and other documentation

The Good Faith Estimate is a breakdown of the total cost of the mortgage, including the APR (interest rate) and all fees. Look it over carefully and make sure it matches up with what you were told before you applied - if there's a significant difference, you may want to consider reapplying elsewhere. Also, check over your final documents at closing to ensure they match the Good Faith Estimate, especially when it comes to fees - some unscrupulous lenders will try to tack on various nickel and dime fees at this point to generate extra income on the loan.

4 - Failing to calculate the break-even point

The break-even point is the date when the money you've saved by refinancing your mortgage equals what it cost you to refinance. For example, if it cost $5,000 in application and closing costs to refinance your mortgage, and you saved $100 a month by refinancing, your break-even point is after 50 months. If you sell the home or refinance before then, it wasn't worth your while to refinance - in fact, it will end up costing you money, in addition to the time you spent refinancing.

5 - Not getting a big enough rate reduction

This is related to #4, above. If you only get a small reduction in your interest rate, say half a percentage point, it's going to take you a long time to reach the break-even point where your interest savings exceed your closing costs. Most experts say you need to knock at least three-quarters or a full percent off your current rate to make refinancing worthwhile. High-end homes can justify a smaller rate reduction than more modestly priced ones, because the resulting savings are much greater.

6 - Trying to time interest rates

Particularly at a time like right now, when mortgage interest rates are unusually low, borrowers may carefully watch daily changes in interest rates, trying to identify trends so they can jump in at the spot where rates are at their absolute lowest. But they may end up missing the boat entirely and see rates go shooting back up again. Timing mortgage interest rate is like trying to time the stock market - it's very difficult even for savvy professionals. Look at it this way - rates are already more than one or two percentage points lower than they have been for most of the past decade - getting greedy over fractions of a percent could translate to a lost opportunity.

7- Cashing out too much home equity

Many people use a mortgage refinance as an opportunity to take some cash out of their home, perhaps for home repairs, investments or a major purchase. They're basically borrowing against the equity of their home. Which is fine. The problem arises when homeowners take out too much equity that they leave themselves exposed should housing prices fall (as happened dramatically in recent years) or boost their mortgage payments so much that they have almost no margin for error if financial problems arise. Be conservative in taking any money out of your home and be sure to leave yourself a healthy cushion in home equity.

8 - Resetting to a longer loan period

Many people seem to forget that, when they refinance their home, they're taking out a whole new mortgage. Often, this can mean a whole new 30-year mortgage, even though they only had 20 years or so remaining on their old one. Stretching out the period like this is one reason refinancing can dramatically reduce your monthly mortgage payments - though not necessarily saving you any money. You could end up paying more in interest costs over the life of the mortgage, even with a lower interest rate. For homeowners facing financial difficulties, stretching out the term of the mortgage can make their monthly payments more manageable and help them avoid a financial crisis. But unless you need a major reduction in monthly payments, it's best to try to refinance into a new mortgage whose term approximates the time remaining on your existing loan.

9 - Agreeing to prepayment penalties

You can sometimes obtain a lower interest rate by agreeing to a prepayment penalty if you pay off the mortgage (such as when you sell the house or refinance again) in the next few years. This can be a good deal if you plan to stay in the home that long, but beware of any prepayment penalties that still kick in after more than three or four years. But if you don't think you're going to be in the home that long, you might want to seriously reconsider whether you want to refinance anyway, unless you have an ARM or zero-interest mortgage that's about to reset that makes it necessary. Otherwise, you likely won't have the home long enough to reach the "break-even point," per #4, above.

10- Paying junk fees

Just like with any other mortgage, borrowers need to be on the lookout for "junk fees" added on to the regular closing costs. While things like loan origination, application and title fees are unavoidable and legitimate, some lenders will add charges for things like "document preparation" or overcharge for obtaining credit reports or document delivery. The rule of thumb here is, if it's something you could do yourself or hire someone to do for less, there's a good chance it's a junk fee.

Published on September 17, 2009