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When interest rates drop homeowners run to refinance their mortgages like bees to honey. Why? To save money of course. But, does refinancing your mortgage actually save you money? Yes and No. Refinancing your mortgage can certainly save you money but sometimes a mortgage refinance can actually cost you money.
Because refinancing a mortgage is not something most of us do often, there are usually many questions when we face the decision of buying a refinance.
Here are a few of the questions we will look at in our series on Mortgage Refinances. What can you do to make sure you get a good deal out of your refinance? How much does a mortgage refinance cost, anyway? What questions should you ask your lender before you sign a refinance? And, what refinance closing costs should you avoid?
You can think of buying a refinance mortgage as changing telephone providers. Imagine you are with Verizon and pay 20 cents a minute for calls to Spain. You have a girlfriend in Spain, so you are always looking for ways to save on your long-distance calls. You then find out that AT&T offer calls to Europe for 10 cents a minute. That would mean you could save 50 percent of your long distance calls. Does this mean you should change service provides. Well, it might, but there are other factors you should take into consideration. For instance, changing providers might mean you have to pay the retail cost of that free phone you got with your 2-year contract. Or maybe, the cost of internet connection is much higher or the quality of service is not as good.
The same happens with mortgages, there are many factors you should consider before deciding to refinance. First, you must check if your current mortgage has a prepayment clause. A prepayment clause will charge you for paying your mortgage off early, which is what you do when you refinance. Prepayment penalties can be expensive. A typical fee is 1 percent of the mortgage balance. So if you have a mortgage balance of $100,000 you may have to pay $1,000 just for the privilege of refinancing.
At this stage you might be wondering how you actually save money on mortgage refinances. The key is interest rates. A mortgage with a lower interest rate will cost you less every month in interest payments. Over the life of the loan a lower interest rate can save you thousands and thousands of dollars. So how can work out when refinancing makes sense for you? That is the theme of our next article in our Mortgage Refinances series.
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