If you own a home, you have probably been inundated by ads offering you a lower interest rate on your mortgage. Sometimes, these new rates are so low as to be unbelievable. However, before you start negotiating with the lender, keep the following facts in mind:
Closing Costs. Even if you save a bundle on your mortgage interest rate, you’ll never feel as if you did because there are always closing costs associated with a refinance. Various fees are added at closing, such as for recording, title, processing, and underwriting. You will need to have your house appraised, and that also costs money. In summary, you will end up paying at least $1,000-$2,000 for closing costs. If your house is worth at least $200,000, don’t expect your closing costs to be less than $2,000.
Points. Points are defined as a certain percentage of the principal that you pay immediately to the loan agency in order to secure a lower interest loan. Usually, 1 point is equal to 1% of the loaned principal- in other words, one point on a house appraised at $185,000 will be $1,850. Oftentimes, loan agencies advertise mortgages with very low interest rates because there are points involved.
Whether you pay for points is up to you. However, if you do, consider whether the payment will be worth it for the time that you plan to own your home. For example, if you refinance a home assessed at $185,000 and pay 2 points for a 4.5% instead of a 5.5% interest rate mortgage, you will have spent an upfront $3,700 in order to save $113/month. This is a good deal only if you spend the next 2 years and 9 months owning your refinanced home. Otherwise, you will lose money upon the sale or future refinance of your home. Incidentally, LendingTree provides the following refinance points calculator, which is quite useful for calculating points and the time needed to recoup their costs.
Time of home ownership. According to the U.S. Department of Housing and Urban Development, Americans own their homes for an average of 6 years. You may own your home for a much longer (or shorter) period of time. However, it is imperative that you think about how long you plan to stay where you are. If you foresee a future job change, a move across the country, etc., then it may be best to not refinance your mortgage.
Bargaining is OK. Finally, don’t forget that, when playing the refinancing game, you are allowed to haggle for and find the best price on your refinance. After all, you’ve already proven that you can pay off a loan. The loan agency that takes on your current mortgage is not doing you any favors, since it will be gaining thousands of dollars in interest from you over the next 10, 15, or 30 years. If time is on your side, negotiate for a no points or even a no closing costs refinance plan. While some loan agencies will balk at this idea, many others will meet your demands, especially if your credit history is good to excellent. It never hurts to try.