3 Must-Dos Before Refinancing Your Mortgage

by Christy Bieber | Published on Oct. 29, 2021

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A homeowner compares print-outs of monthly mortgage statements on the couch.

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Don't make a hasty decision that could cost you.

Refinancing your mortgage can be a smart move for many homeowners. This is especially true if you have a loan with a high rate because you bought your home before rates dropped recently -- or because your credit wasn't lower when you made your initial home purchase.

But, before you move forward with refinancing, there are a few key steps you'll need to take to ensure it's the right financial decision for you. Here's what they are.

1. Find out the closing costs

Refinancing your mortgage is not a free process. There are fees to pay, including loan origination costs, appraisal and survey fees, and more. The fees associated with refinancing -- called closing costs -- can total several thousand dollars depending on which lender you choose.

Lenders need to disclose these costs up front when you apply for a loan, so make sure you know what to expect. You'll either need to pay these closing costs up front -- so make certain you have the cash available -- or you will need to borrow for them and roll them into your loan amount. This means your loan will cost more over time.

While some lenders offer "no-closing-cost" refinances, this usually means you're either borrowing to cover closing costs or your interest rate is higher to cover the fees, so don't assume the loan is really free.

You'll want to make sure the money you save by refinancing will cover these closing costs over time before you move forward. This is especially important if you think you might move soon. For example, if you pay $3,000 in closing costs and save $50 per month on your home loan, it would take you 60 months or five years to break even on the closing expenses. So if you planned to move in two years, for example, refinancing might not be the best move.

2. Shop around for rates

Refinance rates vary from one lender to another. Don't rush into refinancing with your existing lender or with a financial institution just because you have a relationship with them. Get quotes from at least three to five mortgage refinance loan providers including local banks, credit unions, and online lenders. This will help you get the most favorable rate.

Also, be sure to look at the big picture, so you can get the best price and terms overall rather than just focusing on interest rate.

Here's what to look for:

  • Closing costs each lender charges
  • Length of the repayment time
  • Whether the loan is fixed or variable
  • Any fees you'll pay

3. Look at total costs compared with your current loan

Finally, you'll want to compare how the total costs of your new refinance loan compare with your current one. You can't assume that just because you're refinancing to a lower rate loan that you'll always end up better off.

Both your interest rate and repayment timeline affect the cost of repayment. So if you have just 10 years left on your mortgage and you refinance to a new 30-year loan, you'll be adding two decades onto your repayment time. Even if you drop your rate considerably and lower your monthly payments a lot, you'll still end up paying more due to repaying your loan for so long.

In some situations, you may decide you're OK with higher total borrowing costs in exchange for lower monthly payments. But this should be a considered decision you make only after evaluating the total costs. Your mortgage lender should provide details on what your loan expenses will be over the life of the loan, and you can compare this with your current home mortgage to see if you'll save.

By taking these three steps, you can make an informed choice and ensure refinancing is a decision that will benefit you financially in the long run. It's well worth taking the time to do your research, since your home is likely your most valuable asset.

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