Refinancing when you shouldn't

Charles A. Myers, president and CEO of the Home Lending Group in Flowood, Miss., says refinancing can be a mistake if you don't plan to stay in your home for several years.

"One customer wanted to refinance in order to improve his property and rent it, but he would have ended up with a larger mortgage and then needed a different loan because the property would no longer be his principal residence," says Myers. "The key is to make sure the refinance has a net tangible benefit to the homeowner."

Before choosing to refinance, borrowers need to decide how long they intend to stay in the property and determine the break-even point when the savings outweigh the costs, Myers says.

Not keeping up with borrower responsibilities

Homeowners must rely on a lender to refinance, but they have obligations of their own that, if not met, could derail the mortgage refinance. Borrowers must have good credit to refinance, with most lenders requiring a credit score of at least 640 even for a loan insured by the Federal Housing Administration, says Myers.

Lenders can check the borrowers' credit again just before the closing, so you need to maintain good credit and avoid taking on new debt even after the refi has been approved.

"Check the lock-in date for the interest rate on your new loan to make sure you can close before the rate expires," says Busch. "Be sure to turn in all your documentation as soon as it is requested, because a delay could mean that your closing date must be pushed back."

This article was reported by Michele Lerner for Bankrate.com.