Items to consider before you refinance

Lower interest rates may be tempting, and as part of a sound financial plan you should consider whether it makes sense to refinance your current mortgage but don’t forget to factor in the costs of the new home loan in your calculations.

The costs of the new loan could negate potential savings, particularly if you intend to sell before your monthly savings can make up for the costs of refinancing a home–so it pays to estimate costs and shop carefully before proceeding.

Don’t be surprised if your new mortgage carries most of the same costs as your initial purchase mortgage–including an appraisal, processing fees, and other loan closing costs.

Some of these costs and fees may include:

• Appraisal fee
• Land survey fees
• Attorney’s fees
• Title search and insurance
• Points to lower rate
• Recording fees

Closing costs vary city to city but might be 2% to 5% percent of the home’s value. Often, homeowners can wrap their closing costs into the new mortgage, but doing so will increase the loan amount.

An additional consideration for refinancing may include:

Early payoff penalties: Some mortgage companies charge a fee if you pay off your current mortgage in full. Check to see if your home loan carries a prepayment penalty before obtaining a mortgage refinance–this could change the calculation.

Several factors influence the overall cost of refinancing and how you think about them. When evaluating your application and estimating your fees, the following may be considered:

• The value of your home in today’s real estate market. This will be one of the key elements to determining your refinancing costs and your ability to refinance. Your current home value can be much higher or much lower than the original purchase price, with implications for your level of home equity.
• The length of time you have owned your home. Your past record of payment reflects your ability to pay on time. Some lenders even place guidelines on how long you must be in your home before refinancing.
• The remaining balance on your original mortgage. The typical rule of thumb is the higher your remaining balance, the higher the refinance cost will be.

As with your purchase mortgage, financing costs vary according to individual circumstances. Each geographic area, housing market, and lenders will have different policies and fees.

When deciding if a mortgage refinance is right for you, it is important to calculate closing costs and fees. Find out if you can wrap costs into your loan or if you have to pay the costs upfront. Most of all, calculate how long it will take before your monthly savings surpass the costs of refinancing – while you may not be able to predict the future, are you planning to still be in your home at that point?