To refinance your existing mortgage seems to be an inalienable right. Do not listen to the “experts” that will tell you once the prevailing mortgage rate falls .50 – 1% below the rate on your current mortgage you should refinance. Running off to refinance your mortgage when headlines announce mortgage rates are falling is not the best of ideas.
To determine if it is the right time to refinance, it is necessary to recognize the when and why of the reason you want to refinance. The final decision to refinance needs to be based on calculated dollars saved.
The Why of Refinancing:
The overall goal of refinancing a mortgage loan is to reduce interest expense. This can be accomplished by lowering the interest rate on one specific loan or for debt consolidation reducing the combined interest cost. For instance, combining a first and second mortgage to reduce overall cost is good reason to refinance. Because you are restructuring your debt the term may be extended.
The When of Refinancing:
Once you understand why you are refinancing, it is necessary to be aware of whether the rates, costs and other market circumstances are right. The interest rate is only one factor; there are fees needed to be paid. The majority of fees in a refinance can be added to the mortgage amount. This practice results in no out of pocket expenses, but the fees will increase the debt load and interest expense you pay over time. It is simple to calculate how many months it will take to recover these costs through the newly reduced monthly mortgage payment. Common fees are:
- Application Fee
- Credit Check Fee
- Attorney’s Fee (yours and lenders)
- Title Search and Insurance
- Appraisal Fee
- Local Fees (taxes, transfers)
- Document Preparation
There are several good sources that estimate closing costs and can calculate just how much you are saving. This type of process will show you how home-owners need to calculate how many months of lower payments it will take to recoup the closing costs of the new mortgage.
Point to remember: refinancing does not pay off the debt; it just restructures it. The new loan will have a new term (often longer) and a new interest rate (often lower) than the current mortgage.