3 Important Considerations When Refinancing Your Home

While not as challenging as moving, refinancing your home mortgage loan is a big deal. Making the wrong decision could cost you tens of thousands, but a well structured refinance could save you much more. Pay attention to these three areas when refinancing your home.

Refinancing Your Home: Closing Costs

The first place to look out for big expenses when refinancing a home mortgage is the loan closing costs. There are no Realtor related expenses in a refinancing, but you still have the pay the bank, county filing charges, and other related fees.

Sometimes banks will offer you lower fees on refinancing than a mortgage when buying a home for the first time, but sometimes those fees are exactly the same. Whether you are being charged a fixed fee or a percentage of the mortgage value, make sure that the fee does not offset savings you get from a lower interest rate or new loan term.

Refinancing Your Home: Loan Duration

One of the easiest ways to save money when refinancing your home is to shorten the term of your loan. Banks typically give a lower interest rate to a 10-year or 15-year fixed rate mortgage than they will with a 30-year mortgage.

Even with a higher monthly payment, this is generally the best route for long-term financial savings. When I refinanced a 30-year mortgage into a 15-year mortgage a few years ago, my monthly payment went up about $100, but my total interest expense over the life of the mortgage went down by nearly six figures.

Refinancing Your Home: Interest Rate

Even if you stick with the same length loan, refinancing your home with a lower interest rate can save you tens of thousands of dollars. This simple mortgage calculator from Bankrate can help you calculate your potential savings.

For example, a new $200,000 mortgage at 4.5% interest for 30 years would result in $164,813 in total interest payments. The same loan at 4.25%, only a quarter percent difference, would have $154,197 in interest. That is a $10,000 savings!

Get Out of Debt, Don’t Get More Debt

The most important thing to remember when refinancing your home mortgage is to get out of debt faster, not to take on more debt. Getting your mortgage and other loans paid off will allow you to save more for retirement or other investments.

Some homeowners think that equity is a bank account that you can tap into to get more things you want to day. While you can pull money out from a mortgage refinancing in some cases, unless you are using that money to increase the value of the home, it is the wrong financial decision in the long-run.

Instead, if you can work hard to pay off your mortgage early, you can own your home outright, lower your monthly expenses, and use the money you were paying for your mortgage each month to save and invest for your future. That is always a great investment.

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