Bob Tedeschi writes July 20, 2006:
If borrowers are comfortable with the type of loan they currently hold but want to reduce their monthly payments, some simple math can help them determine when to get a new one. First, borrowers should determine the cost of a new mortgage, and then calculate how long it will take to recoup that expense, given the monthly mortgage payment savings. Refinancing can be just as expensive as the original financing on the home. A borrower’s title insurance company will sometimes offer discounts on the new loan’s policy, but otherwise the mortgage cost, and process, will be much the same. (One exception is when a borrower’s original loan includes a prepayment penalty. In those cases, the cost of a refinancing jumps considerably. Penalties can run 3 percent or more, depending on the terms of the loan. So borrowers refinancing a $300,000 mortgage with a prepayment penalty may need to factor in $9,000 of additional costs when considering whether a new loan is worthwhile.) Refinancing applicants, then, will retrace the steps of their previous mortgage loan experience as they arrange an appraisal, shop for lenders and rates, and sit for the closing. If the borrowers plan to stay in the home long enough to recoup the entire cost of refinancing, then refinancing is likely to be worth the work. (Online refinance calculators, like the one at www.hsh.com/usnrcalc.html, can speed the number-crunching process.)
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