If you’ve been considering refinancing your mortgage, there are a few things you need to take into consideration before you do. Otherwise, you may not end up any better off than you are now.
There are several reasons to refinance your mortgage. From saving money on your monthly payments to debt consolidation, no matter why you are refinancing, you need to understand the costs associated with this process and how to determine if it is worth it to actually refinance.
What to Know When Refinancing Your Mortgage
1.Your break-even point – Before you pick up the phone or start looking online for refinancing opportunities, you need to know your break-even point. This is the point in time that the costs associated with refinancing equal the savings you will gain by refinancing.
For example, let’s say it costs you two grand to refinance your mortgage, and your monthly savings after the refinance is $200. That means it will take you ten months to recoup your costs. This is the break-even point.
There are plenty of free online calculators to help you determine your break-even point. You can find one here.
2. Point, points, points – They say there’s no such thing as a free lunch, and that is certainly true when you decide to refinance your mortgage. All of those very friendly mortgage brokers out there waiting to help you find a great rate aren’t doing it out of the goodness of their hearts.
They are doing so to make money. You can’t get around paying points, but it’s important to know that they will add to the cost of your new loan. In general, one point equals 1 percent of your loan amount.
That means, if you are getting a new loan for $200,000 and you are being charged three points, it will cost you $6,000. Just know that these points aren’t written in stone, so depending on how badly the company wants your loan, they may be willing to reduce the number of points.
This is an important tip when refinancing your mortgage. Plan to haggle if necessary. It can save you a lot of money.
3. Mortgage insurance – As this will be a new loan, you may be required to purchase mortgage insurance. This is typically the case when there isn’t at least 20 percent equity available in the home.
That’s because banks calculate that it will take 20 percent of your home’s value to recoup their money if you default on your loan. So, if there isn’t enough equity in your home, be prepared to add this expense to your refinance.
4. Reduced tax advantage – Most people write off the interest they pay each year on their income tax bill. This can be a very large deduction. So, you want to be aware that if you reduce the amount of interest you are paying on your mortgage, you will also be reducing the amount you can deduct on your income taxes.
You’ll find that when refinancing your mortgage you can save a lot of money on your monthly payments and in the long run on interest, but just make sure you understand the process and expenses involved with refinancing before you dive in.
If you’re thinking about refinancing, you might want to check out Lending Tree. They offer rates as low as 3.50% and are super easy to work with.
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