Cost Of Refinancing

Written By: refinancing on March 11, 2010 No Comment

If you are looking to save money, refinancing may be just what you need. But not everyone will save money. You must look at the cost of refinancing and how it relates to you.

When you refinance, you simply pay off one loan with another. The reason you do this is because the new loan terms are more favorable than the previous. Even though it costs money to refinance, the main reason for refinancing is to save money (over the long term).

There are many ways you can save money by refinancing your mortgage.

- By replacing your current mortgage with a loan with a lower interest rate, you save money monthly and over the course of the loan.

- By changing the term or length of your loan, you can lower your monthly payments.

- If you have enough equity in your home, you can consolidate your all your bills into one payment and stretch the total out over the course of your loan which will in most cases drastically reduce the amount you pay monthly.

When does it make sense to refinance? It doesn’t make sense for everyone but if you follow the rule of thumb you have a pretty excellent chance of saving money. If you’re just looking to lower your interest rate, consider refinancing when advertised interest rates are 1.5 to 2% lower than your current rate. Because of the upfront costs associated with refinancing, you should intend to stay in your home at least 3 years to really see the benefits of the lower interest rate.

Some other reasons to refinance include:

- Change to a fixed rate. Your adjustable rate mortgage (ARM) may soon become unmanageable. If you refinance you wont have to worry about how much your payments will be as the rates continue to adjust.

- Build up equity quicker. If your income has increased dramatically, you can reduce the length of your loan. Your payments will be higher but you’ll be paying off the principal quicker.

- Do a cash out refinance. Use the equity in the home to pay for a major buy or college education.

What Are The Costs of Refinancing

When you’re asking about how does refinancing work, you have to reckon about the costs that go along with it. Plot on paying about 3-6% of your principal in refinancing costs, plus any prepayment penalties. In order to keep clients from refinancing often, many companies will include a prepayment penalty. Your mortgage documents will clearly state if you have a prepayment penalty – although it may not clearly state how much it is. You must look at these costs and determine if refinancing is worth it. Many times the refinancing lender will roll the costs into the loan so you don’t have to pay so much up front. Just be aware that you will be paying these costs, and really more because you now have interest on top of it.