No-Cost Home Mortgage Refinancing
There are a lot of lending companies that advertise no-cost home mortgage refinancing. However, this may have a different meaning from what you think. Make sure that before you apply for a home mortgage refinancing plan, you understand all the details that go with this mortgage refinancing plan.
There are basically two ways to avoid up-front fees. First, there is an arrangement wherein the lending company would cover the closing costs. However, with this kind of arrangement, you would have to pay for a higher interest rate. This interest rate would have to be paid for the whole loan term. You can ask the lending company or a broker for some comparisons of the up-front costs you would have to pay.
The second type of a no-cost home mortgage refinancing plan is when fees are incorporated into your loan. These costs become part of your principal loan. Even though you would not be requires to pay cash, you would instead pay for these costs with interest throughout the term of your home mortgage. If a lending company offers you this kind of no-cost home mortgage refinancing plan, they might include a prepayment penalty that would discourage you to refinance in the first year of the loan. With this, you can ask the lending company to explain to you all the fees and all the penalties so that you understand things better.
You can also calculate your break even period, for you to understand if home mortgage refinancing is the way to go for you to be able to manage your finances well. Here are the steps you need to do for you to be able to compute:
- Get your current home mortgage payment every month.
- Subtract the new home mortgage you would have to pay if you refinance.
- The result is the monthly savings you would get.
- Subtract your current tax rate from 1.
- Multiply the monthly savings by the after-tax rate you got from the previous step.
- The result is your after-tax savings.
- Get total closing costs of your new home mortgage loan.
- Divide the total closing costs by your after-tax savings.
- The result is the number of months you would have to pay for the cost for home mortgage refinancing.
