Understanding Mortgage Refinance Rates

Curious whether a refinance will really save you money? Here's how to compare the costs of a refinanced loan against your current mortgage's costs.
By Karen Lawson

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When considering refinancing, it's important to compare the cost of keeping your current mortgage against that of a refinanced loan. In addition to comparing what you'll pay in interest costs for each loan, also consider the costs related to settlement, points and mortgage insurance that you may face when refinancing.

Calculating all of the costs and potential savings associated with refinancing may seem complicated, but it's a key step in determining whether you should refinance your mortgage. Looking at the big picture involves considering all potential costs that can occur when refinancing.

Things to consider when refinancing

Here are some key points to keep in mind:

  • Cash out refinancing may require mortgage insurance. If your current loan-to-value ratio (LTV) is less than 80 percent, you are not required to pay for mortgage insurance. If you refinance to an LTV above 80 percent, you'll be required to purchase mortgage insurance, which protects the lender in the event you don't make your mortgage payments. When comparing the cost of a cash-out refinancing for debt consolidation, it's important to know whether your new mortgage will require the additional cost of mortgage insurance.
  • Refinancing involves closing costs. In addition to considering refinancing rates and comparing them to your current mortgage rate, you'll need to include closing costs in your cost comparison. Although you won't pay any real estate sales commission, you'll likely have to pay lender fees, escrow or attorney's closing fees and vendor fees, including title insurance, recording costs and pro-rated taxes and insurance. These costs can easily amount to a few thousand dollars. When you apply for refinancing, your lender will provide you with a good faith estimate of closing costs, which can help in determine the entire cost of refinancing your loan. It may be possible to finance closing costs by increasing your new mortgage amount, but you'll be paying additional interest on the higher balance.
  • There is a "break-even" point for refinances. A mortgage refinance calculator can show you how long you must keep a refinanced loan in order to recoup the cost of refinancing. If you're planning to sell your home within a couple of years, refinancing at a lower rate may not make financial sense.

Using free online refinancing tools can help you estimate savings associated with refinancing to a lower rate, but these tools are meant to provide general estimates only. If you need a more detailed analysis, it's a good idea to consult with your financial adviser or a mortgage professional.

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