Refinance Considerations

When you are looking to refinance, there are several things you should keep in mind while making your decision. Refinancing is a big step, and it is important to be confident in both your decision to refinance and the deal you eventually accept.

First, you should realize that even a small reduction in your interest rate can quickly help you financially. This is because many mortgage companies will waive charges such as application, legal, and appraisal fees. These are fees that could normally add anywhere from $1500 to $3000. Companies will do this by charging a rate that is less than what you were paying before refinancing but slightly higher than the prevailing market rate.

Second, you should think about paying points, which are a measure equal to one percent of the total loan. Paying some points up front when refinancing can secure you a lower rate. However, paying points on the loan up front would only be a good move if you plan on staying in your home for at least three to five years. Another way to reduce your rate if you plan to stay in your home long-term is paying closing costs upfront.

Third, you may still be able to end up with a lower rate without paying any points or closing costs at all. If you've had your mortgage for a few years, most likely you've already reduced your principal by thousands of dollars. Because of this reduction in principal, you may be able to tack on the closing costs associated with refinancing and still end up with a mortgage that is significantly smaller than before refinancing. Of course, in addition to a smaller mortgage, you will also have a reduced interest rate and lower monthly payment.