There are many reasons homeowners refinance: to lock in a favorable interest rate, to withdraw equity they’ve built up in their home, or to pay off their mortgage more quickly. If you’re thinking about refinancing, here are some things you’ll need to consider:
- The interest rate of your current mortgage versus the current rate. If, for example, you see that rates have dropped two points, you’ll want to seriously consider refinancing.
- The type of loan you have. If you have an adjustable rate loan, you may want to refinance to switch to a fixed-interest loan.
- How long you plan to stay in your house. If you’re thinking of selling in the next three to five years, the amount you save on refinancing may not cover the costs associated with closing.
While refinancing will include closing fees, the goal is saving money over the long term. Closing fees are always part of the equation. Even mortgages that are advertised as having no-cost or low-cost closings have closing fees — they’re just not called closing fees.
Fees and paperwork aren’t the only drawbacks to refinancing, though. If your current mortgage agreement includes a prepayment penalty, you may lose money by refinancing unless you can negotiate with your lender to waive the prepayment clause.
Also, if you will be paying points on your new mortgage loan, you won’t be able to deduct the full amount on this year’s tax return. The IRS requires you to amortize the points over the life of the loan.
One way to save money and time is to refinance with the same lender who issued your original mortgage loan. They already have your paperwork, so you may not have to redo everything. You also have a relationship established, and that can help you while negotiating.
Refinancing isn’t something you should enter into lightly; it can be time-consuming and expensive. But once you run the numbers, you may find that the long-term savings will offset the costs related to refinancing. Then you can take the money you save each month from your reduced payments and put that to better use.