The 7 mistakes I made when refinancing my mortgage

When my husband and I refinanced our mortgage in 2009, we felt confident we were making the right move. Since both of us had exceptional credit, we knew we could reduce our mortgage rate by one percentage point or more, as is considered de rigueur when refinancing. A no-brainer, right?

In retrospect, I wonder. We should have considered other factors beyond the rate, ranging from the overall cost of refinancing to its impact on our home equity stake. And we should’ve made some comparisons among lenders, instead of rushing off to our current bank.

Here are seven missteps I made when refinancing my mortgage in 2009 – and what I would do differently today.

1. Focusing only on the interest rate

I have to admit: I was laser-focused on the fact that we could lower our mortgage rate by 1.25 percent and shave almost $300 off our monthly mortgage payment. That felt like a huge win, and in some ways, it was.

What I didn’t consider was the real cost of refinancing. I didn’t fully grasp the importance of the APR (annual percentage rate). The APR reflects the total cost of the loan: not just the interest rate, but lender fees, points and other closing costs. Your APR can be as much as a full point higher than the quoted interest rate.

Lesson learned: The APR is inevitably higher than the interest rate and is the real number you should compare when evaluating offers. If I could do it over, I would run the numbers through a mortgage refinance calculator to understand the total cost of the refinance, including how much interest we would pay over time and closing costs, not just the monthly savings.

2. Not paying closing costs upfront

Refinancing isn’t free: Like a primary mortgage, it comes with closing costs — various fees associated with applying for, administrating and underwriting the loan that you pay upfront — unless you roll them into the mortgage instead. A no-closing-cost refinance, which lets you do that, sounded great at the time. Between the appraisal, title insurance, lender fees, and everything else, these costs added up, and I didn’t want to pay a big sum out-of-pocket. Plus, adding these expenses into the loan just felt easier.

What I failed to grasp: When you roll over closing costs, the lender adds them to the principal of the new mortgage — and the amount interest is charged on. That results in a larger loan balance, higher monthly payments and more interest paid overall over the life of the loan.

Lesson learned: It’s been more than 15 years since we refinanced. I know by now we’ve recouped the cost of the loan. But at the time, we didn’t crunch the numbers in a mortgage refinance break-even calculator to weigh our options. If I were refinancing now, I would be more interested in paying off the mortgage sooner rather than realizing the immediate savings.

3. Not negotiating fees

While some are non-negotiable, many refinancing fees aren’t set in stone – they’re at the lender’s discretion. That means the lender can lower or even waive these charges, including big ones like the origination fee. Lenders may also offer discounts for automatic payments or paperless statements, to stay competitive and win your business.

In our case, we simply accepted the terms the lender offered as-is, without asking any questions. We don’t know for sure if they would’ve changed anything, but – if you don’t ask, you don’t get.

Lesson learned: Negotiation might not wipe away every fee, but even trimming a few hundred dollars can make a difference. Comparing refinance offers from various lenders puts you in a much better position to get the best deal.

Which brings me to my next mistake…

4. Not shopping around

Refinancing is like buying anything else: You better shop around, as the song says. We made the mistake of refinancing with our mortgage lender without even considering any other institution, mainly because it was easier. I didn’t compare rates, fees, customer reviews or loan terms across companies. I was just happy we were approved and ready to move forward.

Refinance rates and terms vary from banks, credit unions and online lenders. Even if you’ve been a loyal customer, your current lender might not have the best deal.

Lesson learned: Get quotes from at least three to five mortgage refinance lenders and compare their overall costs. Even a small difference in the rate, like 0.25 percent, can lead to significant savings over time.

5. Ignoring the impact on home equity

The most important consideration in refinancing is how much home equity you have. It can eat into your homeownership stake, especially if you borrow against portion of your home’s value with a cash-out refinance.

If you recall, 2009 was a precarious time for the U.S. economy, near the official tail end of the Great Recession. To say home values were dropping would be an understatement. Between December 2006 and December 2009, home prices fell 20 percent on average, according to the Federal Reserve Bank of Philadelphia.

At one point, like millions of homeowners, we were actually underwater on our mortgage, meaning we owed more than the home was worth. And rolling in closing costs didn’t help the situation either. By increasing our overall mortgage balance, we chipped away at the homeownership stake we had built (your home equity equals your home’s value minus the mortgage – the amount of the home you own outright).

Lesson learned: Since then, we have recouped the equity we lost and more. But some homeowners aren’t so lucky. ATTOM Data Solutions reports that more than 5 million properties were still “seriously underwater” in 2019, a full decade after the housing crisis ended. (“Seriously underwater” mortgages are classified as those at least 25 percent higher than the homes’ estimated market value.) Always consider how much a refinance will impact your equity. If home values fall, or you plan to sell before prices recover, refinancing can do more harm than good.

6. Not buying points

Knowing that we didn’t plan to move, we probably should have taken a longer-term view when we refinanced. At the time, we chose not to buy points to lower our interest rate, as we didn’t want to spend extra upfront.

Points will typically cost you 1 percent of the loan amount, which in turn lowers your interest rate by about 0.25 percentage points. While that may not sound like a big difference, over the life of a loan, it can really add up. Let’s say you are refinancing your $300,000 mortgage to a 30-year fixed loan at 7 percent interest. Here’s how the savings might break down:

Lesson learned: Buying points doesn’t make sense for everyone, as it will extend your break-even point on the refi. But if you’re planning to stay put for the long haul, it’s worth doing the math. Fifteen years after the refinance, it’s clear we’ve paid far more in interest than we would have if we’d made that investment. What felt like saving money ended up being a costly mistake.

7. Overlooking term options

When we refinanced, we went from a 30-year loan, which we’d already been paying for five years, into a brand-new 30-year mortgage. In hindsight, we missed a big opportunity.

By refinancing into another 30-year mortgage, we basically reset the clock, effectively extending our mortgage and stretching our debt to 35 years. That means we’ll end up paying more in interest over the long run, even with the lower rate. What I didn’t realize was that refinancing into a 15- or 20-year loan could have dramatically reduced what we paid over time, even if the monthly payment was a bit higher.

Lesson learned: Refinancing doesn’t just have to be about lowering your monthly payments. It’s also a chance to shorten your loan term and potentially save a lot in interest.

The moral to my mortgage mistakes story

Do I regret refinancing our mortgage? No, but if I could rewind the clock, I would approach the process more cautiously. I would’ve run the numbers more carefully, thought harder about the long-term trade-offs and asked more questions upfront about APR and how our home equity might be affected. I would’ve taken a closer look at the costs we rolled into the loan, tried to negotiate fees, and considered whether buying points really made sense for us.

I also didn’t explore whether other refi options, like a shorter-term loan might have been a better fit or realize how important it is to shop around for the best lender.

Lesson learned: The refinancing process isn’t just about snagging a lower rate. Sometimes it pays to think long-term, even when the short-term savings are tempting.

Questions, comments or thoughts about this article? Email me your feedback at lbell@redventures.com.