Refinancing Basic

Imagine a world that the only cost when borrowing money was interest. that world would be a lot simpler. There would be no application fees, title insurance premiums or points to consider, and when rates fell you would run out a refinance.

Unfortuantly life is not that easy and there are plentiful mortgage products that didn't exist a generation ago. A reduced rate is awesome, but if it locks you in it will cost you $4,000 dollars is it really worth it? If not what is a better rate worth to you?

The list of one-times costs are countable and you should have a decent understanding of each one.

     Title insurance- title companies charge this to gaurentee your title is free of liens encrumbrances.

     Appraisals- This cost is to have a professional appraiser value your home.

     Broker Commissions- a broker that helps you find the best rate.

     Credit application fees, loan organization fees, paperwork processing fees, etc.

This next cost is very important, but it is also optional. "Discount points" let you buy down your interest rate to a lower one. A point is normally worth one percent of the loan amount.

Certain costs, if you incur, them are ongoing. Premiums for mortgage insurance, if the lender requires it, could increase your monthly payments by a few percentage pointsfor the entire life of the loan.

The concept of breaking even defines the science of refinancing. An example is how many months will it take you to earn back those $3,600 in fees if your monthly rate is lowered by $100. The answer is 3 years for all you math savy people.

Life would be much simpler if someone just handed you a rate sheet with the bottom line of costs saying $3,600 dollars. But it doesn't work that way, so many costs are percentages based on the amount you intend to borrow.

Typically the break even question is expressed like this: what interest rate would justify the refinancing? And the best way to do that is to use a mortgage calculator!

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