"Refinancing is the process of the same mortgagor paying off one loan with the proceeds from another loan," according to the Lending Tree definition. Homeowners typically look to refinancing as an opportunity get a new mortgage with a lower interest rate to reduce monthly mortgage payments and lower the total interest paid over the life of a mortgage loan. Key questions help you decide whether a refinance opportunity is right for you.
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What are the Closing Costs?
Your main objective in considering a refinance decision is to figure out what your break-even point is, according to Lending Tree. Similar to a first mortgage, a refinance typically includes closing costs due at the time of the mortgage closing. For a refinance to make sense, you need to know that you will remain in the home long enough to save enough in interest to justify the upfront investment. Common refinance closing costs include lender fees, third-party fees, prepaids, escrow and government taxes and fees, according to the website Refinance Tool Box in its overview of "Refinance Mortgage Closing Costs." Some of these fees, especially non-lender fees, are almost always included. Lender fees can vary, which creates some separation in costs from one lender to the next. Refinance Tool Box notes that lenders are legally required to produce a good faith estimate of closing costs.
What is the Best Strategy to Build Equity?
Your home is not just the place you live, it
is an investment. Liz Pulliam Weston points out in her MSN Money article, "Beware the hidden costs of refinancing," that some homeowners refinance their mortgage two to four times, or even more in some cases. While this may seem look a good move in each instance, better foresight could protect homeowners from making multiple investments in closing costs. Weston also notes that refinancing when you have paid several years on your mortgage can actually cost more money in interest if you refinance to spread out the loan repayment. These maneuvers that produce extra costs conflict with a wise financial goal of building equity in your home. Consider a short-term term repayment period on a refinance to a better rate, advises Weston.
Is There a Prepayment Penalty?
Carolyn Warren, in her article "Common Mortgage Rip-Offs and How to Keep From Getting Burned" on her site Mortgage-Helper, states that the most common complaint she hears from people is that the mortgage lender did not disclose a prepayment penalty. "The typical prepayment penalty is 6 months' interest on 80% of the balance," according to Warren. She says that homeowners need to insist when they obtain a mortgage that the lender indicate where in the contract it states that there is no prepayment. If you are currently seeking a refinance, you need to know if your existing mortgage has a prepayment penalty, and if so, what the terms are. Before you get the new mortgage, insist on the disclosure Warren mentions.