If you are a homeowner considering refinancing your mortgage, how do you know if refinancing is the right financial decision for you? You certainly do not want to lose money when it comes to your mortgage; there are expenses involved and it will take time to recoup these expenses from any potential savings you could have, it is important to weigh the advantages and disadvantages prior to refinancing your mortgage. Here is what you need to know before you refinance your mortgage.

Is Refinancing Your Mortgage the Right Choice?

If you are refinancing your mortgage to pay less interest or lower your monthly payment you will not benefit from any potential savings right away. The reason for this is that it will take you time to recoup your expenses from lender fees and closing costs on the new mortgage. You need to consider how long you plan on living in your present home; if you will moving in less than five years you probably will not have time recoup these expenses. The longer you plan on living in your current home the more savings you will realize from refinancing your current mortgage.

Does Your Current Mortgage Have a Prepayment Penalty?

Many mortgage lenders include prepayment penalties in their loan contracts. If your current mortgage has a prepayment penalty you will have to pay the penalty when you refinance the mortgage. This penalty will cut into any potential savings you are hoping to achieve. Prepayment penalties can be quite expensive; many lenders charge up to six months worth of interest on 85% of your original loan balance.

Refinancing Costs

There are many expenses involved in refinancing your mortgage. Application fees, lender fees, title insurance, legal expenses, and closing costs all need to be factored into your decision to refinance you current mortgage. In addition to these fees the mortgage lender may require you to pay discount points in order to qualify for the lower interest rate. As a rule of thumb, if the new interest rate is not 1.5% lower than what you are currently paying, refinancing might not make good financial sense unless there are other reasons like cashing out equity. To learn more about refinancing your mortgage while avoiding common homeowner mistakes, register for a free mortgage guidebook using the links below.