3 Mortgage Refinancing Mistakes First-Time Homeowners Make

Mortgage refinancing allows a home owner to renegotiate a mortgage loan for a potentially better deal. Some refinancing is done to lower monthly payments, some to get a better rate and some to shorten the length of the loan. Each home owner has a specific reason to seek a refinancing deal. There are a number of potential benefits, but there are also significant penalties to refinancing. Many first time homeowners do not work to mitigate these penalties and end up making a bad decision when it is time to refinance.

#1 Refinancing Too Early

Some new homeowners get overly excited at the options they have available upon purchasing a home. Immediately upon becoming a homeowner, you will find lenders are more willing to work with you, offering home equity lines and other forms of financing. Homeowners tend to be very responsible borrowers, so lenders begin approaching them with new opportunities. As a first time homeowner, it is key to understand the importance of keeping your existing mortgage in tact for some time. Jumping off the loan right away and into another lender's arms can reflect poorly on your credit score. You will also find better refinancing deals if you wait until more of your mortgage is paid off. Try to hold onto an original loan and all its terms for at least 20% of the contract before even considering refinancing. This would be six years on a standard 30-year mortgage.

#2 Thinking Short Term

Saving on monthly payments now is not always preferable to paying off a loan as fast as possible. Many homeowners only look at the short-term benefits of refinancing and ignore the overall, long-term cost. Look at both options in terms of how much each will cost over the life of the loan before thinking about any potential refinancing deal. You should be particularly careful if a refinancing option allows for any cash out election, meaning you would take equity out of the home and liquidate it into cash in the process of refinancing. Building equity as a first time homeowner will give your more flexibility when it comes time to take the next steps.

#3 Ignoring Buy Down Options

Refinancing is not always preferable to simply buying down the mortgage. If you need lower monthly payments for a short period of time, a lender may allow you to pay interest on the debt up front. In exchange for this lump sum, the lender will actually lower your overall interest and lower your monthly payments month-to-month. Buying down a mortgage is a great idea if one of the owners of the home is heading back to school or will experience a smaller salary for a few years. It is also one way to put extra cash to the mortgage payments without experiencing a penalty. For example, if you receive a bonus check, you may be tempted to try to pay down some of your mortgage principal. There can be prepayment penalties to this. Instead, you can buy down a part of your mortgage, lowering your interest for 1 to 3 years, and allowing your standard monthly payment to pay a bigger chunk of your principal than it is currently doing.