When refinancing a mortgage there are many different facets that need to be considered prior to closing on the loan. It is a financial move that will have lasting repercussions for you, some good and some bad, which is why you need to look at all variables before you lock yourself in to something you can’t undo. Financially refinancing a home mortgage can sometimes be a risky move, but there is a lot of positive potential as well and you could end up saving thousands. Here are just a few of the things you need to remember when you decide to refinance your home.
Short Term Cost of Refinancing a Mortgage
All mortgage refinances have costs associated with them, even the ones that claim to be no cost. This is a claim they can make because you won’t pay much up front, but over time you will pay down the up-front costs.
When refinancing there are a lot of players involved and each of these players is going to need to get paid for their services. So you’ll have your lender – who is doing the refinance – your real estate agent and/or loan officer, the home appraiser, the title company, the underwriter, and the legal fees for the lawyer used by the lender to make sure everything on the loan is done correctly. You can choose to hire a lawyer as well, which will be an additional fee if you do so.
All of these services are necessary for the refinance to go through, and when you add up the cost of each of them, you end up paying quite a bit just to make sure the refinance meets the proper standards. This doesn’t include additional closing fees that you’ll pay after all is said and done. In all, it’s not uncommon for a homeowner to pay three to six thousand dollars at the time of closing.
Long Term Effects of a New Home Mortgage
Typically when you refinance you do so hoping that you will save money in the long run. These up front thousands are going to slow that process down, so prior to refinancing you need to do a few calculations to determine whether or not it will be worth it. A refinance calculator is a really good resource and one that is worth using.
What you need to do when calculating is to determine your break-even point, your final amount after the loan is paid, and the amount saved or spent if you take on a new interest rate and lower mortgage payment. Oftentimes a loan looks and sounds great until you start crunching numbers, then you realize that financially it’s not as good as it looks. When this is the case, you’ve got to go back to the drawing board and work another deal or forego the refinance entirely. Again, a refinance calculator is really helpful when doing these calculations.
While doing the math you need to look for a few indicators that show that the refinance may not be worth it. First, will the refinance extend the life of your loan? If the answer is yes then you’ll want to look at amortization schedules and compare the old loan with the new loan. You may be getting a lower interest rate, but if you pay that lower rate on a loan that’s been extended ten years, there is a good chance you’ll end up paying more. You also need to pay attention to the APR or annual percentage rate. The interest rate and APR each affect the total amount differently so don’t forget to take into account what you’ll be paying on the APR as it can negate the positive side of the refinance. Last but not least, you need to determine when you will break even because that will tell you when the refinance has paid itself off. If you break even within a couple of years, that’s a pretty good indicator of a decent refinance, but if it takes five years or longer it may not be worth it, especially if you end up leaving the residence for any reason.
As mentioned above, refinancing a mortgage can be a smart financial move, but in order for it to be a move that benefits you it’s essential that you keep yourself involved, crunch the numbers, and really weigh out all of the pros and cons of the refinance before you take on the new loan. If you determine that refinancing a mortgage benefits you financially, by all means go ahead and take on that loan. There’s not much better than saving thousands of dollars because you’ve negotiated a great deal.