Questions to Ask When Refinancing

Questions to Ask When Refinancing - The decision of whether or not to refinance your home mortgage can be a tough one, and should not be taken lightly.

Before you take the plunge, get answers to the following questions to ask when refinancing:

What is the interest rate?

In addition to determining the interest rate of your loan, ask whether the interest rate is fixed or adjustable. If the rate is adjustable, there are additional questions to ask:

  • How often will the interest rate change? Monthly, every six months, or once a year?

  • What is the most the interest can increase in any given year?

What will my monthly payment be?

Know how much your new payment will be, and whether the payment includes property taxes and homeowners insurance. Also ask if you'll be responsible for covering these expenses on your own.

What are the fees?

Exorbitant fees could offset any potential savings from lowering your interest rate, so be sure you have a solid understanding of the charges associated with your loan.

Will you have to pay points?

By paying points, you're essentially buying a lower rate. As with fees, points have the potential to deflate the benefits of refinancing.

Will you have to pay PMI?

If your loan-to-value (LTV) ratio is higher than 80%, chances are your lender will require you to buy private mortgage insurance (PMI). You'll have to pay PMI until you've made enough payments to own 20% of your home, so if you're already close to this goal, the addition of PMI is of less significance. As PMI will increase your monthly payment, it should definitely be factored into your refinance equation.

What is the loan term?

Even a deeply slashed interest rate won't save money if you're doubling the length of your loan, so make sure you understand the terms of your refinance.

Is there a prepayment penalty?

Does your current mortgage carry a prepayment penalty? If so, figure the penalty into the overall cost of refinancing your home loan. In the case of a pre-payment penalty, future refinances will be less profitable, so be sure the interest rate and fees are attractive enough to outweigh the benefits of future refinancing options.

As you can see, there's much more to refinancing than finding a lower interest rate. After determining the answers to these questions, you'll be in a better position to evaluate whether a home refinance is in your best interest.

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