Refinancing your home in Michigan can be a fantastic way to save money or reach your financial goals. But just like anything important, there are some common mistakes homeowners make that can cost them time and money. Knowing what to watch out for can help you have a smooth and successful refinance experience.

Here are some of the biggest refinancing mistakes to avoid:

1. Not Shopping Around for the Best Deal (in Michigan and Beyond!)

• The Mistake: Many people just go with the first lender they talk to or automatically refinance with their current bank. According to LendingTree, 54% of homeowners and buyers only get one loan offer.
• Why it’s a Mistake: Lenders offer different rates and fees. Just because your current bank gave you a good deal on your original mortgage doesn’t mean they’ll have the best refinance offer now. Different lenders have different programs, and their rates change all the time.
• The Smart Move: Always get quotes from at least two to three different lenders. Compare not just the interest rate, but also all the closing costs (which we talked about in a previous post!). Even a slightly better rate or lower fees can save you thousands of dollars over time.

2. Focusing Only on the Interest Rate and Forgetting About Closing Costs

• The Mistake: Homeowners often get excited about a low interest rate and don’t pay enough attention to the fees involved.
• Why it’s a Mistake: Refinancing costs money! These “closing costs” can add up to 2% to 6% of your loan amount. If your closing costs are very high, it might take a long time to “break even” and actually start saving money from your lower monthly payment.
• The Smart Move: Always ask for a detailed “Loan Estimate” or a Pre-Application Cost Estimate from any lender you are considering. This form clearly shows all the fees. Calculate your “break-even point” – this is how many months it will take for your monthly savings to pay back the closing costs. If you plan to move before that point, refinancing might not be worth it. For example, if you save $100 per month and your closing costs are $3,000, your break-even point is 30 months (2.5 years). The Golden Rule as I like to call it, is that if your break-even is 12 months or less the costs are low enough for refinancing to be worthwhile.

3. Extending Your Loan Term Too Long

• The Mistake: Many people refinance their 7-year-old mortgage back to a brand new 30-year loan, just to get a lower monthly payment. If you’ve been in your home for under 10 years, and have not accelerated payments, there’s a high probability most of your mortgage payments went to interest over principal.
• Why it’s a Mistake: While a 30-year term gives you the lowest payment, if you have been in your home for 4 years, for example, refinancing back to a 30-year mortgage means you potentially spent TENS OF THOUSANDS of dollars in interest over the last 4 years that you are trading to save a bit more per month. That refinance is NOT saving you anything- in fact, it’s costing you more. An experienced lender with your fiscal well-being in mind will NOT recommend starting over or extending your term.
• The Smart Move: Consider refinancing to a shorter term, like 15 or 20 years, if your budget allows. You’ll pay it off faster and save a lot on interest. Or try to match the remaining time on your current mortgage. A lender can set the amortization over any time period you would like; however, you will need to make your wishes known if the loan officer does not mention it to you first.

4. Not Checking Your Credit Score Before Applying

• The Mistake: Applying for a refinance without knowing where your credit score stands.
• Why it’s a Mistake: Your credit score is a huge factor in the interest rate you’ll be offered. If your score has errors or isn’t as good as it could be, you might miss out on the best rates.
• The Smart Move: Get your free credit reports from AnnualCreditReport.com before you apply. Look for mistakes and dispute them. If your score is low, take some time to improve it (pay bills on time, keep balances low) before applying to qualify for better terms.

5. Making Big Financial Changes During the Refinance Process

• The Mistake: Taking out new loans (like for a car or furniture) or even opening new credit cards between the time you apply for your refinance and when you close.
• Why it’s a Mistake: Lenders use debt monitoring, while the loan is in process, to know if any new credit has been applied for since application. New debts can mess up your debt-to-income ratio, causing your loan to be denied at the last minute!
• The Smart Move: Once you apply for a refinance, try to keep your finances as stable as possible. Don’t apply for new credit, make large purchases, or change jobs until after your refinance has officially closed.

6. Financing More Than Necessary. 

• The Mistake: Rolling in all your prepaid expenses associated with your refinance into the new loan.

• Why it’s a mistake: Any expense you are financing adds to the loan amount and will add up in the long run.

• The Smart Move: If your new loan and current loan have escrow accounts for property taxes and homeowners’ insurance, you will be getting reimbursed from your current servicer the remaining funds in that escrow account. If you have the cash to do so, bringing the escrow balance you are going to be getting back as cash to closing is NOT a bad idea. You are bringing money that will be refunded within 30 days of closing the refinance. 

By avoiding these common refinancing mistakes, you can help ensure a smoother process and maximize the benefits of your new mortgage here in Michigan.

Ready to refinance your Michigan home without the stress of common mistakes? With 25 years of experience helping homeowners in Metro Detroit and across Michigan, I can guide you through every step, helping you avoid pitfalls and find the best refinance solution for your unique situation. Contact me today for a clear and confident path to refinancing success!