Consumers who refinance their mortgages often pay too much, borrow more than necessary, or refinance when it serves no real purpose. Here are some tips to help you avoid costly mistakes that might otherwise offset the benefits of your refinance strategy.

Consumers are eager to refinance to get better interest rates or to borrow money for home improvements or other expenses. In their haste to refinance, however, many homeowners make errors that can erase the potential benefits of refinancing.

Here are six pitfalls to avoid:

1. Paying too much in closing costs

Closing costs can differ significantly from one lender to the next. Compare various lenders for the best deal, and get a written estimate of costs. Then, pick the one with the most attractive offer.

2. Forgetting to lock in your rate

At your request, the lender "locks in" or confirms your interest rate. If rates go up, forgetting to lock could result in a higher rate and cost you more money over the life of the loan. Tell your lender to lock in the rate that you're satisfied with, and get a confirmation in writing to verify that it was done in a timely manner.

3. Not shopping around

There are many different mortgage refinance options, and it pays to shop around for the best rates and terms. Plan ahead to give yourself plenty of time to compare your existing lender to other competitors. Let lenders know that you plan to give your business to the one who offers you the best choices.

4. Refinancing too frequently

Refinancing is a great way to save; but each time you refinance, you incur closing costs and mortgage refinance fees. It takes time to break even on these expenses. If you refinance too often, you'll never reap significant benefits and savings. Calculate how long it will take to begin realizing net savings, and avoid the temptation to refinance your loan prematurely.

5. Ignoring pre-payment penalties

Some loans have a built-in penalty that's activated if you pay off the loan early. By refinancing, you may automatically set off the pre-payment penalty on your current loan and get hit with an unexpected charge. Review your mortgage carefully-if there's a pre-payment clause, take this into account before you pay off the balance by refinancing.

6. Borrowing too much

If you have good credit, lenders will generally offer you more money than you need. But each time you borrow, you wind up paying interest on the loan balance. Decide how much you truly need and can afford to borrow. Then, avoid the urge to increase the size of your refinance loan beyond that amount.By avoiding these common pitfalls you can increase your equity, decrease your expenses, and ensure that your plan to save money is a good one. As a result, your mortgage refinance will pay for itself and generate positive cash flow over time.

Published on April 17, 2007