If you're looking to refinance your mortgage, avoid these roadblocks

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If you’re struggling to pay your mortgage due to the economic fallout from the coronavirus, you’re not alone. More than 4.1 million homeowners have taken advantage of government or private lender relief programs, like the CARES Act, opting to put their mortgage payments on hold for a few months. According to a May survey from the Mortgage Bankers Association, 8.36 percent of total loans are now in forbearance plans, up from 8.16 percent the week prior.

While these programs can help preserve a borrower’s credit score, there may be a better solution. With record-low interest rates, which you can easily explore on Credible, some homeowners may choose mortgage refinancing to lower the payment.


If you decide to do a mortgage refinance, however, you’ll want to avoid three common pitfalls.

Avoid: Accepting the first offer

Mortgage refi interest rates can vary greatly, and it’s essential to shop around to find the best rates. Even a fraction of a percentage point can add up to big savings. Borrowers who seek out one additional quote save an average of $1,500 over the life of the loan and an average of $3,000 if they got five quotes for refinance rates, according to Freddie Mac.

For example, if Bank A offered a 30-year, fixed mortgage with a 3.50 percent interest rate, while Bank B had the same length at 3.375 percent. If you chose Bank B, your monthly payment would be $884 with a total loan cost of $318,309. Bank A’s loan will result in a monthly payment of $898 and a total cost of $323,312. You’d save $5,003 over the life of the loan by choosing the 3.375 percent loan. The mortgage refinance rates you can qualify for are based on your location and credit score, and you can visit Credible to get personal quotes.


Avoid: Being put into forbearance incorrectly

If you took advantage of mortgage forbearance options during the pandemic, one of the terms is that you’re unable to refinance your loan until three months after the forbearance ends as long as you’ve made three consecutive payments under their repayment plan.

However, if you reached out to your lender to learn about financial hardship programs, you’ll want to make sure your loan wasn’t miscategorized. Some homeowners were improperly put into forbearance even though they remained current on payments. If this happened to you, your mortgage refinancing application could be declined.

Avoid: Skipping the math

Just because refinance rates are low, it may not always make sense to refinance. There are other factors to consider besides just a low rate. For example, if your current mortgage has an interest rate of 4.25 percent, your savings could be substantial by refinancing to a loan with an interest rate of 3.375, lowering your monthly payment from $984 to $857, and reducing the total interest you pay by nearly $46,000. However, if you’re 10 years into that loan, your payments have been mostly applied interest due to mortgage amortization. It might not make sense to refinance, unless you choose a mortgage with a shorter term.


Also, check into the closing costs and determine how long would it take to break even. Closing costs can range from two to five percent of the loan’s value. With a $200,000 mortgage, you could incur costs of $4,000 to $10,000. Determine your break-even point by dividing your closing costs by the amount you will save each month. In our example above, you save $127 a month by refinancing. If your closing costs are $5,000, it will take you 39 months to break even. Consider whether there’s a chance you’ll move or pay off your loan within that time period.

Low-interest rates have increased interest in refinancing. With the current uncertainty of the economy, it’s smart to lock in your rate as soon as you can if you take advantage of them. Credible's free online tools can help you compare rates and get personal quotes in minutes without impacting your credit score.

By understanding your refinancing options, you can help protect your financial well-being in these unprecedented times.