{"id":286940,"date":"2016-04-04T10:41:53","date_gmt":"2016-04-04T15:41:53","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/bankruptcy\/debt-relief\/do-s-and-don-ts-refinancing.html"},"modified":"2025-08-07T13:57:17","modified_gmt":"2025-08-07T18:57:17","slug":"do-s-and-don-ts-refinancing","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/bankruptcy\/debt-relief\/do-s-and-don-ts-refinancing.html","title":{"rendered":"Refinancing Do’s and Don’ts"},"content":{"rendered":"\n
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Mortgage Refinancing Do's and Don'ts<\/h1>\n\n
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\n By Amy Vandervort-Clark, J.D.<\/a> | Legally reviewed by Susan Mills Richmond, Esq.<\/a>\n | Last updated\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Refinancing your current mortgage is a helpful option for homeowners to take advantage of lowered interest rates or improve their credit scores. It is sometimes an appropriate way to resolve financial problems, but it can complicate your financial situation if you’re not careful. As with any financial decision, it pays to research and read the small print. The mortgage process can be complicated, as can refinancing.<\/p>\n\n <\/div>\n\n\n\n

Below are helpful refinancing tips and some pitfalls to avoid.<\/p>\n

Mortgage Basics<\/strong><\/h2>\n

The vast majority of people need a\u00a0mortgage<\/a>\u00a0when buying a home. A mortgage is a type of loan used to purchase real estate. Most mortgage types require the homebuyer to make a down payment to secure the loan. The homeowner makes mortgage payments for the loan term, and the mortgage company holds an interest in the property. Most first-time loans are 30-year mortgages, though you can opt for a 15-year loan. If you fail to make on-time payments or stop paying on your home loan, the mortgage company can foreclose and take the property.<\/p>\n

These loans can be\u00a0fixed-rate or adjustable-interest-rate mortgage loans<\/a>. With a fixed-rate mortgage, your payments and\u00a0interest rate<\/a>\u00a0remain stable. Your\u00a0monthly mortgage payment amount\u00a0can change with an adjustable-rate mortgage.<\/p>\n

In addition to conventional loans, the most common types of mortgages include government-backed programs like the\u00a0Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans<\/a>.<\/p>\n

The mortgage lender you closed with may not be the one to whom you make payments. After closing, Fannie Mae, Freddie Mac, or another investor generally buys your original mortgage loan.<\/p>\n

Why Refinance Your Existing Mortgage?<\/h2>\n

Refinancing is not a second mortgage. It is a new loan that pays off your current mortgage and sets up a new mortgage with more favorable terms.<\/p>\n

Homeowners consider\u00a0refinancing for many reasons, and\u00a0are many different types of refinances available. Depending on your financial situation, you may want a cash-out refinance to access your home equity rather than apply for a\u00a0home equity loan<\/a>. Some refinance to remove the need for\u00a0private mortgage insurance<\/a>\u00a0on their new mortgage.\u00a0<\/p>\n

You could want to switch to a fixed-rate loan rather than an adjustable-rate mortgage for added stability. Perhaps the market has swung and you want to take advantage of lower\u00a0rates on mortgage interest. Your finances might have improved since taking out your original mortgage, and you might want to switch to a 15-year loan instead of your 30-year mortgage to reduce the amount of interest you’ll pay.<\/p>\n

The Do’s of Home Refinance<\/h2>\n

Do<\/strong>\u00a0research on the refinancing process. Refinancing your current loan is similar to taking out your original mortgage. You may need a home appraisal, and you will pay closing costs.<\/p>\n

Do<\/strong>\u00a0calculate your \u201cbreak-even point”. There are many costs involved in refinancing. Your break-even point is\u00a0where your monthly savings, or savings over the life of the loan, are equal to your costs. Any additional savings are your benefit.<\/p>\n

Do<\/strong>\u00a0look at the different types of refinancing available. The VA, USDA, and FHA offer a streamlined refinance option, as do some lenders.\u00a0This is a more straightforward process and will save you an appraisal fee on your home. A cash-out refinance will allow you to tap into your home equity.<\/p>\n

Do<\/strong>\u00a0look at how a lower interest rate may impact your tax returns. Paying less mortgage interest will give you less to deduct at the end of the year.<\/p>\n

Do<\/strong>\u00a0compare the cost of refinancing with the cost of your existing mortgage.\u00a0Federal “Truth in Lending” laws<\/a>\u00a0require that lenders give you certain uniform disclosures containing the annual interest rate charged, total finance charge, loan amount, and other costs. When choosing a lender, you must consider all refinancing costs to compare your options.<\/p>\n

Do<\/strong>\u00a0refinance your higher-interest-rate loans with lower-interest-rate loans if the terms of the loans are comparable. As borrowers, you need to be certain that the new rate you will be paying is not a “teaser” rate that will go up after an introductory period, hitting you with larger payments.<\/p>\n

Do<\/strong>\u00a0refinance your secured debts if the new loan is for the same length or less than you have left on your old loan. The interest rate on the new loan should be lower than the interest rate on your existing loan. The\u00a0rate on the new loan usually must be substantially lower than the interest rate on the old loan to make up for costs and fees associated with the new loan.<\/p>\n

Do<\/strong>\u00a0consider refinancing your home to\u00a0pay off debt<\/a>\u00a0for tax purposes, but only if you are not in financial difficulty and not at risk of losing your home. Only refinance if it is beneficial from a tax standpoint or if the lack of benefit to your taxes is outweighed by other benefits of refinancing..<\/p>\n

Do<\/strong>\u00a0watch out for\u00a0refinancing scams<\/a>. If you get unsolicited offers to consolidate all your loans into one\u00a0mortgage<\/a>, to sell your home with an option to repurchase it, or to save your home from foreclosure, beware! If an offer sounds too good to be true, it likely is.<\/p>\n

The Don’ts<\/h2>\n

Don’t<\/strong>\u00a0refinance your bank loan with a finance company to get a lower monthly payment. The interest rate with the finance company will likely be higher than the bank loan and usually contains fees, insurance, and other costs.<\/p>\n

Don’t<\/strong>\u00a0refinance to lock in a lower interest rate without looking into the fees and costs of the new loan. You may end up paying more for the new mortgage than the lower interest rate and lower tax deduction are worth.<\/p>\n

Don’t<\/strong>\u00a0refinance your home for more than its market value. Lenders that offer loans exceeding your home’s value can charge much higher interest rates than standard mortgage lenders. You may be unable to deduct some of the interest you are paying on the new loan. Worse, you risk losing your home through foreclosure if you can’t make the payments.<\/p>\n

Don’t<\/strong>\u00a0refinance your home to pay off\u00a0unsecured debts like credit cards<\/a>. Unsecured creditors have little recourse to collect the debt. You can often negotiate a settlement or new payment terms with credit card companies. If you refinance your home and fall behind on the mortgage, the lender can foreclose and you could lose your home.<\/p>\n

Don’t<\/strong>\u00a0refinance an unsecured loan as a secured loan. If you do, you risk losing the property you pledged as collateral.<\/p>\n

Don’t<\/strong>\u00a0refinance because of pressure from a debt collector. Debt collectors try to intimidate you into refinancing or tapping into your home equity so that they will get paid because, well,\u00a0they legally\u00a0can’t do much else.<\/p>\n

Does Refinancing a Mortgage Hurt Your Credit Score?<\/h2>\n

Refinancing your mortgage can affect\u00a0your credit score<\/a>\u00a0in several ways. These include:<\/p>\n