There are lots of reasons you might want to refinance, but most people fit into one (or more) of the basic four categories. Most people want to reduce their monthly payments; some want to consolidate outstanding debt, such as combining a first and second mortgage into a new first mortgage; some want to tap built-up equity in their homes, and some just want to get out of a mortgage product that they don't like, or that's costing too much -- going from an ARM to a fixed rate mortgage, for example. Whatever group or groups you fit with, there are certain rules that you must follow to reach the goal desired.
2% Rule of Thumb? --- is often wrong.... Why? The only way to determine whether refinancing is for you is to go about it the right way: by analyzing the time and the cost factors.
What Is Your Time Frame? --- When determining your time factor, it's crucial to be honest with yourself, since the time factor will determine if and when you begin to save money. It's a fact that refinancing can cost a considerable amount of money, so you'll want to be as certain as possible of your time frame.
More or Less Mortgage? --- One other factor involved in refinancing your mortgage: how much money you'll need or want to borrow. Most lenders will let you borrow around 80% of your home's current appraised value. Some will allow more, if you're simply refinancing your existing loan. But, if you're looking to tap equity, known in the mortgage industry as a 'cash-out refi', you'll probably find that it's less than 80%. In many cases, cashing-out will mean that you'll have a larger mortgage balance than before, with possibly a higher monthly payment...
Taxes --- Some states have surcharges known as 'mortgage taxes', 'realty transfer taxes', 'mortgage recording fees' and others. It is very important to find out if your area is one that does charge these fees, since they can add as much as 2% of the mortgage amount to your closing costs, and significantly lengthen the cost recovery time.
Points --- The major closing cost in obtaining any mortgage are 'points', also known as 'discount' and 'origination' points. Origination points are treated differently for tax purposes, but each point is equal to 1% of the mortgage amount you borrow. If you decide that paying points is not for you, expect to pay an incrementally higher interest rate. Origination points are a different matter, since they technically are a fee, and they have no effect whatsoever on the interest rate you can obtain.
What Kind of Mortgage? --- Getting the wrong kind of mortgage for your situation, even with a low interest rate, can, and often will, end up costing you money in the long run. Conversely, getting the right kind of mortgage, without a low enough interest rate, can make it take a very long time to recoup your closing costs. That's because some mortgages are better suited for a shorter time frame, some for mid-length times, and others for the long haul.
Closing Costs --- costs for appraising your property, researching your title to the property, title insurance, credit checks, attorney review fees, inspections for insects, and others. These can easily add up to a few thousand dollars, but there may be ways you can reduce these costs.
Update your title insurance policy, instead of taking out a new one.
If your original mortgage required Private Mortgage Insurance (PMI) because you put less than 20% down on the property, and your new mortgage will be 80% or less than the appraised value, you can probably drop your PMI coverage, saving you as much as the equivalent of 1/4 of one percent on your new interest rate.
Shopping around and comparing can also help you save on these fees.
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