With so many homeowners refinancing, it is tempting to jump on the bandwagon and do the same. Especially with the low interest rates and appealing offers that are popping up all over the place. While refinancing is a wise choice in many situations, it is important to note that it is not without costs of its own.
Some refinance companies charge an application fee just to begin the application and refinance process. This is an upfront cost that is never rolled into the new loan amount and must come out of your own personal funds. There are lenders who do not charge application fees, and some lenders who do charge application fees often run promotions where that fee is waived.
You might remember that when you bought your home and took out your mortgage, there were costs involved and fees that you paid related to that mortgage. When you refinance, those same fees and costs must be paid all over again, even though they can sometimes be rolled into the new mortgage. If you think that you aren't paying for things like settlement costs and points, think again. Even if you don't have to bring cash to closing, the lender has probably added these costs into the term of your loan. Be sure you check to see exactly how much they are charging you and how much money for these expenses is being rolled into your new mortgage balance. To have a lower monthly payment, you're going to wind up paying more points, and to pay lower points you're going to need to pay a higher monthly payment.
Another cost that you have to consider when you are thinking about refinancing is whether or not you have an early payoff penalty on the mortgage that you are currently carrying. Sometimes these fees can be steep, and at times makes it senseless to refinance if the fees exceed the amount you will be saving by refinancing in the first place.
While there are costs involved with refinancing, in the majority of cases, it still pays off in the long run. Refinancing can save a homeowner tens of thousands of dollars. A rather large sum compared to the amount spent on refinancing.
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Written by Craig Romero
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About the Author
Craig Romero is an author and mortgage analyst dedicated to helping homeowners maximize the investment in their homes.