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Hidden Costs of Mortgage Refinancing

Hidden Costs of Mortgage Refinancing

There is much more about mortgage refinance than meets the eye. While you rejoice the prospect of saving a lot of money, you should also be prepared for hidden costs that may take you by surprise. It is always better to do your homework before you take the plunge. Make sure you do the math properly taking everything into account to see how much you’d really save.

Comparison is the name of the game. Never settle for the first offer. Always compare rates from at least four lenders for refinance

Generally, the cost of home refinancing will be lower than your original loan, but the fact remains that refinancing a mortgage loan involves closing costs. There are some fees that don’t apply to refinancing; but the closing costs can still be substantial. So, it is prudent to confirm the fees that your lender will charge this time around.

You may want to consider the roll-in financing option that some mortgage lenders offer. This gives you the freedom to roll the refinancing closing costs into the loan itself. Thus, you won’t be required to pay any up-front costs, but, remember, this will result in somewhat higher monthly payments, because your loan balance is higher.

You will obviously want to know how much you can save by lowering the interest rates. After all, that is the primary reason why go in for refinance in the first place. You can use the amortization calculator to see how much you can save through better rates alone. All you have to do is just enter the loan amount, interest rate, and the length of the loan to see how much interest and principal you’ll be paying each month.

You must know that even a couple of percentage points can make a big difference and swing the percentage any which way. For example, you can save $300 a month by switching your $180,000, 30-year loan from a rate of 9 percent to 7 percent. That’s quite a lot, isn’t it?

On the other hand, if you take a home loan mortgage refinancing for a lower rate, it will cut down tax deduction, which means you will have to pay higher income taxes. Now, this is something you were totally unaware of. But, it is a big factor in considering the cost of refinancing. You know your tax bracket. So, you can figure out the impact it will have on your tax return. For instance, if you’re in the 25 percent tax bracket, and a mortgage refinance will lower your monthly interest payment by $200, taxes will claim $50 of that savings. As a result, your true savings will be $150 a month.

If the value of your home increases over time, then you will regret your decision of refinancing, because you will lose those pesky PMI payments. However, you have the freedom to end your PMI payments as long as the new loan amount is lower than 80 percent of the property value. In order to find out how much PMI is costing you, you need to check your current mortgage statement.

In the ultimate analysis, refinancing is a welcome option when you’re stuck in a high-interest loan. It can considerably lower your rate even if it is less by just a couple of percentage points. You can recoup the closing costs in a matter of months. However, you must look at the numbers before you leap. That will help you save a lot and you need not worry about unanticipated surprises.

 

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