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How Does Refinancing Work? Beware of Hidden Costs

If you want to refinance your home , you are basically looking to apply for a new mortgage. The whole idea of refinancing your home is to replace your current mortgage loan for a new one that possibly has a lower interest rate. You may also refinance your home for the purpose of getting money for another investment or to free up expenses. This is basically the same thing as getting  a 2nd mortgage. Refinancing your home may have certain advantages which can allow you to adjust the equity in your home, monthly mortgage payments, and lower the interest rate that can potentially help you save thousands of dollars in mortgage payments over the years.

It advisable to consult a professional or contact your original lending institution before you consider refinancing your home. You will be subjected to a verification process, such as verification of your employment and a credit check. You should also request a good faith estimate, this is basically a note from your lender that you can use as a basis, especially if your are going to be shopping around and dealing with other potential lenders.

There are certain loan processing costs involved when refinancing your home, therefore it is extremely important that you understand all of the costs and hidden charges involved.

Hidden costs and transaction fees that come with refinancing your home may exceed the long term savings that you have intended, in many cases it may just not be worth taking advantage of any new attractive interest rates because of the penalties of renegotiating your current mortgage contract. If your current situation does not mertit refinancing your home, you may still have other options to consider, such as possibly refinancing your car loan or consolidating  your credit card balances.

If your are looking to refinance the mortgage from your current bank, it would be a good idea to ask if there are certain fees that can be waived or special discounts available for established customers. Remember that even though you may be looking at a more attracive interest rate than what you currently have,you will also have to take into consideration the costs of points and loan originating fees.  Get your lender to give you the specifics on the points, that way you will be able to compare interest rates using the same number of points. The basic rule of thumb is, 1 % of the loan amount or each point you pay, will reduce the mortgae interest rate by 1 quarter percent.

Because of the costs inherent in refinancing your home, you should try to lower your mortgage interest rates by at least 2% , the downide to paying lower interest rates is that you won’t be able to deduct as much on your income taxes, however you may still take advantage of dedcuting some of the finance charges for the year that the refinancing occured.

If it turns out that refinancing your home is just not financialy viable over the long run, you may want to look at the option of a home equity loan instead. A home equity loan allows the home owner to borrow against the accumulated value of the home and uses the home itself as collateral.

Generally in the past, home equity loans were considered relatively low risk and much easier to get due to the fact that real estate prices tend to rise in value over time.  However with the advent of the housing market crash in the past year, many homes values have depreciated much lower than the actual cost leaving many homeowners oweing considerable more that what the current value of the property has now become.

In these turbulent economic times, it may be best to wait out the ‘ recession’ until the market starts to stablize before embarking on refinancing your home.