If you were lucky enough to buy your home with mortgage rates were at their rock-bottom, you may not want to consider refinancing right now because rates are a bit high.  However, if you have a higher mortgage interest rate, an adjustable rate mortgage, would like different payment terms, or want to pull-out some of your home equity for a major purchase or college expenses, then a refinance of your mortgage might be a good idea. 

This is important to know and to watch out for, because while you might find a good mortgage loan, you can also pay a ton of junk fees at closing for the option.

Is Refinancing Worthwhile For You?

The general rule is that refinancing your mortgage is worth while if your current interest rate is 2 or more points higher than the current market rate.  This number creates a safe margin where the cost of closing on your refinance balances out with your interest rate savings over time. 

The other consideration is how long you are looking to stay in your current residence.  Most people agree that it takes 3-5 years to recoup the costs of your refinance, and your lower interest rate, to see any real savings.  If you are going to move next year, then you do not want to refinance.  However, if you will be keeping you home for the next 5-10 years then a refinance can be a great idea.   

What are the Costs of Refinancing My Mortgage?

There are many fees and costs associated with the mortgage industry.  These are generally referred to as “closing costs” because they are mostly all paid by you at the closing table.  Here are some of the most common charges that you are most likely to have to pay to refinance your mortgage: 

• Application Fee. This charge is imposed by your lender and covers the initial costs of processing your loan application and the fees associated with requesting and checking your credit with the credit reporting agencies.
   

• Loan Origination Fees - The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan documents.

• Points - Points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on an $80,000 loan would be $800. In some cases, the points you pay can be financed by adding them to the loan amount, but generally you will have to pay them out of your pocket.
   

• Prepayment Penalty - A prepayment penalty is a penalty you pay to your lender if you pay off your mortgage early.  You should always be sure to look at the prepayment limitations on the mortgage loan you are taking out; especially if you plan to pay the mortgage off early.  You never want to sign on a loan with a prepayment penalty.  A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing! 

• Escrowed Funds - Funds sufficient to pay for taxes or insurance that are due.

As a homeowner you should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs or 3 to 10 percent on bad credit mortgage loans plus any prepayment penalties. One way of saving some of these costs is to check first with the lender who holds your current mortgage. The lender may be willing to waive some of the costs and allow you to refinance with them.