Hidden Costs of Refinancing

Often, people don't realize how much refinancing will cost them until it is too late. One should always beware of the hidden costs of refinancing. That being said, one should never rule out refinancing without finding out from the potential lender all costs involved, and than calculating whether any actual saving will be made by committing to the refinance deal.

Refinancing can cost a great deal upfront because of prepayment penalties, lawyer fees, application fees, appraisal fees, and many more. That being said, some lenders push those fees into the monthly payments. Don't allow the lender to fool you into thinking that those costs don't apply. Something similar happened to my friend Georgina, who I discuss in "How Much Should Refinancing Cost?". If it is true that you are being offered a deal like this, which is called a "roll-in" refinance package, be sure to figure out if the result of increasing your balance will actually make you pay more in the long run. In other words, because you have a greater balance this will mean that your interest payments are also higher.

The way in which you figure out whether you are saving money is to calculate breakeven. This is something I mentioned in "How Much Should Refinancing Cost", but want to discuss in a little more detail.

Something you should know about calculating your breakeven is that the income tax bracket you are in can play a role in determining whether you will save money. For instance, the lower your interest rate, the lower your tax deduction. When calculating breakeven, one should always take into account that the greater income taxes will affect your savings.

Calculating breakeven will allow you to figure out the point you will start saving money and making up for any extra closing costs required to refinance (if you do at all). Information you will need includes the amount of time left on your existing loan, your new loan term, and whether or not you will finance points and upfront costs or pay them in cash. All of these figures can be put in Calculator at the Mortgage Professor's website (also see his article "Mortgage Refinance Tutorial").