If you've been thinking about refinancing your mortgage, you may be wondering about ads you've seen that sound too good to be true. It's important to be well-informed before making a decision about refinancing, so here are a few basics to get you started.
1. You Won't Get Most Advertised Rates
Mortgage refinancing may seem especially tempting if you notice ads that offer extremely low interest rates, but it's important to be aware that there is usually some fine print about how these super-low rates are only available if you pay a hefty fee upfront in "discount points." Each discount point is equal to 1 percent of your loan, and you pay these at the time of refinancing in order to bring your interest rate down to that advertised level.
2. You Can't Refinance a Mortgage for Free
There is no way to refinance your mortgage for free, although you might see ads that suggest this is possible. Your lender has their own costs, which they will pass on to you either all at once or over a period of months. These fees vary, but they always include a "loan origination fee" or "origination points," which can be around 1 percent of your loan.
Additional charges may include the cost of an appraiser and a home inspector, a credit check, a title examination, document preparation fees, and prepayment penalties on your old mortgage. Shop around to find the lender who offers you the best price as well as the best interest rates.
3. It Might Not Be Worht It to Refinance
The decision of whether to refinance your mortgage depends more on your personal situation than on prevailing interest rates. While you should take various factors into account, there is one simple calculation that everybody should do before deciding to refinance: Find out when your "break even" point falls, and make sure you don't plan to sell your house before that date.
For this calculation, first add up all the costs of your refinance. Then look at how much money you will save on your monthly mortgage payments after refinancing. Your "break even point" will come after you have saved enough on lower mortgage payments to make up for your refinancing costs.
For example, if it costs you $2,400 to refinance, and your monthly payments are $100 less than they previously were, it would take you 24 months to reach the point where your monthly savings would equal your refinancing costs. Therefore, refinancing would only be worth it to you if you plan to stay in your current home for longer than 24 months.
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Lenda provides a start to finish solution to get your mortgage refinance completed fast. You see all the interest rates and all the applicable costs up front before deciding which loan is right for you. Lenda provides 100% transparency and a seamless loan process without surprises. Visit Lenda today to get a free quote.