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Counting the cost of refinancing

Posted by  on Mar 27, 2015
 

A drop in interest rates can touch off a wave of mortgage refinance activity, but there is much more to refinancing decisions than simply comparing interest rates.

There are costs entailed in refinancing that go beyond just the interest rate on your new loan. To make sure that you take a step forward rather than a step back when you refinance, take care to account for all the following:

    1. Points. Points are a percentage of the loan that are paid up front -- one percent equals one point. Points complicate rate comparisons somewhat, because often you can lower the ongoing interest rate by paying points up front, but you have to account for that cost somehow. This is why the annual percentage rate, or APR, is so important. It may seem similar to the interest rate, but APR gives you a rate that includes up-front expenses like points smoothed out over the life of your loan. You can compare using a mortgage calculator. Just keep in mind that if you plan to repay your mortgage over a shorter time than the stated loan term, you should adjust the APR calculation accordingly since up-front costs will have a heavier impact on APR if spread over a shorter time.
    2. 15 Yr. Fixed - Refinance Rates from Our Lenders in VA

      Lenders
      Rate
      APR
      Monthly Payment
      LoanDepot, LLC
      3.000%
      3.257%
      $1,381
      Quicken Loans
      3.750%
      3.912%
      $1,455
      Rocket Mortgage
      3.375%
      3.535%
      $1,418
      Last Updates: 08/16/2017 See More Rates
       
    3. Loan fees. There are a number of fees associated with taking out a loan too -- application fees, loan origination fees, appraisal fees, etc. For comparison purposes, you should strive to have as many of these fees included in your APR calculation as possible because they can cut into or even erase your interest rate savings. Note that even if you paid points and fees on your original loan, you should only include such up-front costs for the new loan in any refinancing comparison, since you will have already paid those charges on your existing loan.
    4. Prepayment penalty. Sort of a booby-trap built into your current loan, a prepayment penalty is the amount you agree to pay if you repay the loan ahead of schedule, which includes refinancing. Check your current loan terms and account for this cost in any refinancing comparison, if applicable.
    5. Payment structure. Refinancing does not change just your mortgage rate, but it can also impact the structure of your payments. For example, paying points may lower your payments in the long run but require you to come up with more money up front. Shifting to a shorter loan term can lower your interest rate but raise your monthly payments. You need to check that your budget can handle the cash flow demands of your new loan.
    6. Total interest expense. While making sure your budget can handle your new payment structure is important, that structure is not the only consideration when refinancing. It is easy enough to reduce monthly payments simply by stretching your remaining loan balance out over a longer time period, but this is likely to increase the amount of interest you pay in the long run. Before refinancing, you should look at how it will affect the total amount of interest you are required to pay over the life of the loan.

Dramatic drops in current mortgage rates will always spark interest in mortgage refinance. While such a rate drop may signal an opportunity, just be sure you look before you leap so you only refinance when it truly is in your best interests.

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