Refinancing errors can be costly. Here are six of the most common ones that you'll want to avoid on your way to landing a new loan.

1. Not comparison-shopping to find the best deal

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Too many borrowers grab the first mortgage they see.

You probably wouldn't buy a new car without shopping around and comparing prices. Same goes for a plane ticket.

So why would anyone grab the first mortgage they see? Yet studies have found that more than 30% of borrowers never comparison-shop for mortgages, says the U.S. Consumer Financial Protection Bureau.

Recent research by LendingTree found that homeowners who refinance without shopping around pay an average of $163 extra per month or $1,953 more per year.

So, compare mortgages from three lenders, maybe more. Be sure to ask for loan estimates, says Viral Shah, co-founder of the online mortgage lender Better.com.

"The only way to validate an offering and compare two options apples-to-apples when you’re rate shopping is to get an official loan estimate," Shah says. "A loan estimate is a standardized document detailing all the costs associated with your mortgage."

2. Looking for a zero-interest mortgage

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Think you'll find a zero percent mortgage? Your bubble will be burst.

Did you see headlines that the Federal Reserve recently cut interest rates to something close to zero? Yeah, that happened — but don't assume it means 0% mortgages are available.

Because they're not. Thirty-year mortgage rates have been at some of the lowest levels ever seen and are very attractive, but don't waste your time hunting for a loan that's interest-free.

"A Fed rate cut to 0% does not mean that mortgage rates do the same," says Kimberly Lanham, senior vice president of Digital Risk, a mortgage consulting firm. 

Instead, mortgage rates are closely tied to the yield, or interest, on 10-year Treasury notes, Lanham explains.

Also remember that when you see a survey of average mortgage rates, they're just that: averages. Some banks and other lenders may have rates that are higher than average, particularly if they're swamped with mortgage applications and want to tamp down that demand.

3. Taking too long to make your decision

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Don't dawdle with your refinance.

Financial markets have been volatile, and so have mortgage rates. So don't dawdle. Try to move quickly to lock a rate if you see one that would work well for you.

"The mortgage market is evolving quickly. Rate changes and program guideline changes are common. What’s available today may not be available tomorrow," warns Chris Ryan, mortgage loan officer with Citizens One Home Loans in the Washington, D.C., area.

If you obsess about trying to time things ju-u-u-u-u-u-u-u-ust right and land the perfect mortgage rate, you're likely to miss out on the best deal available.

"The best rule of thumb is that if the numbers make sense, seize the opportunity," says Shah, of Better.com. "The cost of waiting to see if rates go lower can backfire instantly, not making it worth the risk."

Spot a good rate? Use this calculator to see how you might save by refinancing:

4. Not having your paperwork organized

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Have your paperwork organized and ready to present to the lender.

You could lose out on a refinance opportunity if you fail to have your "docs" in a row.

"Homeowners need to understand the mortgage process and what is expected of them," says Lanham, of Digital Risk. "Having all documentation regarding income, assets and taxes makes the process much smoother."

It's important to get your taxes done on time, if not sooner, Shah says.

"Your tax returns are used to determine exactly how much you can afford to spend on your mortgage every month. Because a mortgage commits you to years of payments, we want to make sure your loan is affordable both now and later in life," he says.

According to Shah, lenders will expect to see: one to two years' worth of personal tax returns; business tax returns going back up to two years, if you own more than 25% of a business; and one to two years' worth of W-2s or 1099s.

5. Forgetting about mortgage closing costs

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Yes, refinances come with closing costs, too.

Refinances aren't free.

"Refinancing includes closing costs similar to the ones you paid when you got your original mortgage," says Shah. You must pay fees including a loan application fee, a mortgage origination fee, a fee for an appraisal, a settlement fee, and others.

These mortgage closing costs typically will hit you for about 2% to 5% of your loan amount, or an average $5,749, according to the latest estimate from real estate data firm ClosingCorp.

If you can't or don't want to pay your closing costs upfront, you can have your lender cover some of the expense — but in exchange you'll be given a slightly higher mortgage rate.

"Another option is to 'roll-in' your closing costs by adding them to your mortgage balance," Shah says. "Both choices can drastically reduce your closing costs and make a 'no-cost' refinance possible."

6. Not being patient

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Don't get upset if your mortgage seems to be taking too long.

It's true that you need to move swiftly if you want to refinance your mortgage at one of today's rock-bottom rates — but then, be prepared to chill. The coronavirus pandemic has slowed down mortgage processing.

"Lenders are handling larger volume levels and patience is necessary," says Ryan, of Citizens One. "Real estate transactions have been deemed essential so business continues with strict adherence to safety measures."

Borrowers face delays in mortgage approvals and closings, and title searches take extra time, warns Richard Pisnoy, a principal with Silver Fin Capital Group, a mortgage broker in Great Neck, New York.

"Many town halls and county clerk’s offices are closed or not set up online to pull these items, and lenders will not close without some of these searches," he says.

But lenders want to show that they appreciate your patience. "Most are offering longer rate lock periods at the same price as shorter lock periods, to compensate for the backlog," says Pisnoy.

Take a look at today's best mortgage rates where you are.

About the Author

Doug Whiteman

Doug Whiteman

Editor-in-Chief

Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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