Refinancing your home can have great benefits, giving you lower interest rates and lower monthly payments on your mortgage. However, you should be aware of the costs and added expenses you can incur from doing so. These costs aren't always obvious, and making yourself aware of them will help you make the best choice.
You are probably focusing your decision on one or both of two main factors: interest and payments. How you go about lowering these is very important. For example, some refinance options will reset the term of your loan. If you have been paying on your home loan for 10 years and had 20 years left of payments, and you reset this term to 30 years at the start of your refinancing, your payments will go down simply because you are paying the same amount over more time. To combat this, keep your new mortgage term to the same or less than the existing one.
Another cost to think about is cashing out. This could add to your total debt in the long run. If you have done several refinances over time and added a few thousand to the loan to help with closing costs, you have added a large sum of money to your total debt. This isn't a normal cost, but it is one to consider when thinking about refinancing.
A helpful tool to use when thinking about refinancing is the recapture period. To figure this, take the closing costs and divide them by the monthly savings. For example, if you pay 2,000 in closing costs, and get a $125 dollar reduction in monthly house payment, it will have paid for itself in just 16 months. This can be helpful to consider when weighing benefits of refinancing.
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