5 Questions to Ask before You Refinance

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In this market, with rates as low as 3.5%, it’s tough not to think about refinancing. Just cutting back from 5% to 3.5% on a 30 year $100k loan can save you around $100 per month, which means the loan could pay for itself in a very short period of time. However, this doesn’t work in all cases, and I want to share why. Before entering into any refinance negotiation, ask yourself these five questions first.

1. Can You Pay Points?

A single point is 1% of the loan value, so $1,000 on a $100k loan. This isn’t a huge amount to pay in order to reduce an interest rate, but you have to calculate the cost savings over the lifetime of the loan to see how many you should pay or not pay.

2. Are Points Placed on the Loan?

Many refinance companies will try to place points on the back of the loan, which means you are paying interest in them. This is a very bad idea, and can quickly extend the life and total cost of a home loan. Try to pay all points and closing costs up front.

3. Are You Adding Time?

If you are 10 years into a 30 year loan, it would be foolish to refinance to a 30 year loan, even if you do save money. In this case, you are better to bite the bullet and keep your current loan, or refinance to a 15 year mortgage. Never add time to your loan unless you absolutely need the money and don’t mind paying your mortgage for that time.

4. What are Closing Costs?

This is the tricky part, and it’s where banks try to get greedy. Paying several thousand dollars in closing costs might make sense if you can reduce your payment enough to pay recoup that amount, but no matter what you do, do not place those costs on the back of the loan.

5. Is My Rate Fixed?

It would be foolish to move from a fixed rate loan into a variable or balloon rate loan just to save a few dollars initially. Make sure to ask whether the loan is fixed, and for how long it will be fixed. If a bank tries to confuse you or throw a gimmick at you, then it’s time to walk away.

Answering these questions will help you identify studs and duds, but if you want to take it a step further, use our free mortgage calculator & mortgage quotes page to lock in five free mortgage refinance quotes from local professionals that won’t yank your chain or give you the run around. You can then use the mortgage calculator to play with the numbers and see how much money you’ll save should you decide to finance at a lower rate. Just don’t forget about those points and closing costs! Our mortgage quotes might be free, but a refinance rarely is, so always perform due diligence before signing on the dotted line.