Is Refinancing Right for You?

If a borrower refinances in order to pay less interest, they usually will not see the savings right away because lenders tend to charge fees for new mortgages, and there are often penalties for getting out of old mortgages as well. The following issues need to be considered by all borrowers who are considering refinancing:

How long do you plan to live in your current home?

If a borrower only plans on continuing to live in the home for another year or two, he or she may never actually reap the rewards of refinancing. Generally, the longer one plans to remain in the home, the more important it is to consider refinancing.

What is the prepayment penalty on your current mortgage?

Many if not all mortgages carry a penalty of some sort, if you pay them off earlier than the intended date. This amount varies, but can be expected to equal a small percentage of the outstanding balance, or several months worth of interest.

What is the difference in borrowing costs between the mortgages?

When you refinance into a new loan, there may be additional fees added to the cost that are charged by the lender. These fees include application, appraisal, origination and insurance fees, in addition to title search, insurance and legal fees that tend to add up quickly. Lenders also tend to charge discount points, which are paid upfront in an attempt to secure a lower rate. Because of these fees, a posted interest rate does not reflect the entire cost of the mortgage. Other factors, like length of term, type of rate, discount points and upfront and ongoing fees also contribute to this post. It is important for a borrower to weigh the pros and cons of both the old, and potential mortgage, to determine whether or not it is a wise decision to refinance.

Your reduced tax savings:

Refinancing to a lower rate may mean that you’ll have less interest to deduct if you claim mortgage interest on your tax return. Money will still be saved overall, but real savings from the refinance will not be as large as originally believed. It is important to consult a tax advisor for help understanding the tax implications of refinancing.