Careful Considerations
The prospect of lower mortgage payments1 – and greater monthly cash flow – is appealing. But will the savings from a new loan equal the cost of refinancing? Here are some important factors to consider.
Breaking Even
One of the first things you need to consider before refinancing is your "break-even point" – when the closing costs related to the refinance are finally repaid by your monthly savings. Why is this important? If you don't think you'll be in your house long enough to pay off the closing costs, perhaps you are considering selling in the near future, then refinancing may not be a good option.
Other factors that will determine if the refinancing option makes monetary sense – and how much you'll repay – include:
Loan origination and application fees
Any penalty for early payment on your current mortgage
Standard settlement charges, including fees for credit reports, title searches and insurance fees, and appraisals
Extending the Term
You can also lower your monthly payments by extending the term (i.e., length of repayment period) of your mortgage, but be aware that interest rates may be higher with a longer repayment period.
If you plan to stay in your home for a longer period of time, extending the term may not be as big of a consideration because you’ll have time to pay down the principal over an extended time. However, it could be a crucial factor in your decision if you plan on moving in the near future.
1 By refinancing your existing loan, your total finance charge may be higher over the life of the loan.
