12 Personal Finance Dos and Don'ts When Refinancing Your House

Refinancing your house can be a smart money move, or an expensive one that only looks good on the first page of a quote. The difference is usually in the details. Here are twelve personal finance dos and don'ts when refinancing your house, six of each, built on guidance from the Federal Reserve and the Consumer Financial Protection Bureau (CFPB). I will not quote rates or predict them. The point is to help you judge any offer on your own numbers.

The Federal Reserve lists the common reasons people refinance: to lower the payment, to change the length of the loan, to switch from an adjustable rate to a fixed one, or to take cash out of their equity. Those goals pull in different directions. A shorter term can raise the monthly payment. Cash out increases what you owe. Know which one you are after before you compare anything. My article on whether refinancing is right for you helps you sort it out.

Refinancing costs money upfront. The Federal Reserve's method is to divide your total refinancing costs by your monthly savings, which tells you how many months it takes to recover them. If you will keep the loan longer than that, the refinance can pay for itself. If not, it will not. I go deeper in refinance break-even, and my free calculators can do the math.

What should I do before refinancing my house?

Define your goal, check your credit reports, collect Loan Estimates from more than one lender and run a break-even calculation. Make sure you keep an emergency cushion after paying closing costs.

How do I know if refinancing will pay off?

Divide your total refinancing costs by your monthly savings. The Federal Reserve says that tells you how many months it takes to recover the costs. If you plan to stay in the home longer than that, it can make sense.

What should I avoid when refinancing?

Avoid refinancing late in your loan without comparing the total cost, ignoring a prepayment penalty, taking cash out without a plan, and refinancing if you expect to move soon.

Can I cancel a refinance after I sign?

On a refinance, the CFPB says you have three business days to cancel in writing under the right of rescission. You would still owe your original loan.

Does a rate lock protect me?

A rate lock means your interest rate will not change between the offer and closing, as long as you close in time and your application does not change. The CFPB notes it may also keep you from a lower rate if rates fall, and extending it can be costly.