Once you have decided to refinance, how should you go about it? Refinancing costs vary widely, usually depending on the worthiness of the borrower and the policies of the lender. As with any loan, you should shop around. Banks, credit unions, and mortgage brokers are all anxious to help. Typing the word “refinance” into any search engine will give you access to free calculators, as well as lenders willing to quote interest rates and costs online.
Many of the online sites will require you to give personal information before letting you use the calculator. One that does not is the Mortgage Research Center, which you can visit at www.mortgage researchcenter.com.
Another component of the refinance equation that can vary from lender to lender is the interest rate.
Example: A lender may offer a rate of 7% with almost no cost, or a 6.5% rate with a one-point fee plus closing costs. Now the variable of how long you intend to keep the loan becomes very important.
The.5% reduction would save you another $30 each month. But if the point and closing costs are $1,500, it will take fifty months to recoup the money ($1,500 ÷ $30). If you finance the costs, add another five months. If you plan to keep the loan for ten years or even only one year, the decision is easy, as there is a clear cost savings based on time for each loan. If you are in the five-year range, it is more difficult to make the decision.
Another variable to consider is whether interest rates are high or low. If rates are at historical highs, chances are they are going to fall. You may want to refinance again within a short time. You will not have time to get back the cost of your current loan.
You also have to determine the cost of getting out of the loan. The obvious mortgage to avoid if you want to pay it off in just a few years, either by selling or refinancing, is one with a prepayment penalty. There are also less obvious costs to consider. When you pay off a mortgage loan, there are fees involved. These fees will vary depending on your location, but they can amount to a few hundred dollars.
When you are doing your calculations to determine how long you have to keep the loan to recoup costs, these costs should also be part of your equation. Ask the lender to give you a breakdown of what it will cost to pay off the loan. Be sure you are given all the costs and not just the lender’s costs. In some areas, there may be trustee’s fees, escrow fees, and title charges.
As a general rule, if you plan to keep your loan for five years or more, you can almost always find a deal in which the lower interest rate will justify the additional up-front cost. If you plan to keep the loan fewer than three years, the opposite is true. Between three and five years, you have to do the calculations for your specific loan. There usually will not be too much of a difference. Since no one can reliably predict tomorrow, let alone three to five years from now, you can only make an educated guess.