The real determinant is how long it will take to recoup your costs. One idea is to weigh monthly savings against up-front costs. If you can save $100 a month on your mortgage payment by refinancing, but you have to pay $2,500 for the privilege, then you have to keep the new loan for at least 25 months to make up the difference. If you’re planning to move sooner, it doesn’t pay to refinance. But if you are going to stay in the house longer, refinancing is usually a sound financial decision.

Start with your current mortgage company. Because of the high cost of originating home loans, most mortgages aren’t profitable until they’ve been on the books for a few years. Consequently, some lenders will go to extraordinary lengths to keep their customers from going elsewhere. They may be willing to wave some or even all of your fees, especially if you’ve proven yourself to be a quality borrower by making all your payments on time.

Refinancing your mortgage can provide you with a monthly windfall of extra cash, shorten the term of your mortgage and help you build equity faster.
When you refinance your original mortgage, you swap it for another, often because the rate of the new mortgage is cheaper. With the cheaper rate comes smaller monthly payments and extra cash each month.

Also, if your current loan contract includes a prepayment penalty you’ve got to factor it in too. Some penalties can be as high as six months interest on 80 percent of your balance, but diminish the longer you hold the loan.

The points vs. interest rate also presents a mathematical quandary and, but again, do the math. Generally, lower points (each point is 1 percent of the amount financed) produce a higher interest rate. Higher interest rates mean lower points.

Print This Article

This entry was posted on Friday, February 10th, 2006 under Mortgages. Both comments and pings are currently closed.