What to Consider When Refinancing: Hidden Costs

You simply cannot undertake home mortgage refinancing on a lark. It is vital that you do your homework -- thoroughly and completely. As with anything regarding large sums of money and your future, you should be armed with as much knowledge as possible to avoid being preyed upon by the unscrupulous. Mortgage and refinancing hunters are especially vulnerable to charlatans, despite the constant government involvement in the industry’s affairs. However, aside from making sure you aren’t charged for things you weren’t told about, there are some hidden charges that refinancers bring on themselves.

Contrasting Interest Rates: Make Sure You Know the Actual Interest Rate

One of the things you should be concerned about is the total amount of interest you would pay on a refinanced loan. Compare it to your total interest now and see what the difference is. Remember that since most of your early payments are interest and most of your final payments are principal, you will still have a high loan balance after several years of payments. For a traditional 30-year mortgage, the point where your interest and principal are equal is 22.5 years.

Understanding Amortization

If you refinance, you are staring that process, called amortization, all over again. Your very first payment on your first loan was almost all interest—so will your first payment on your refinanced loan. If you refinance more than once, this process can prevent you from building equity in your home.

Is Your Old Loan the Right Loan for You?

Also remember that if you have been paying your mortgage for awhile, perhaps you shouldn’t be thinking about a new loan. Even if your old one is a higher interest rate, you are paying down the equity more quickly than you would be if you refinanced. The one loan product that may be worthwhile in this case is the shorter term loan. 15-year loans are notorious for helping homeowners build equity quickly. Moving constantly can have the same effect, so for people who relocate frequently, the 30-year traditional fixed rate mortgage may not work.

Pay Attention to All of the Home Mortgage Refinancing Loan Fees

And don’t forget about the fees. There are some fees that you should watch out for. Any fees that the broker charges to process your papers and do research on behalf of your application have a high risk of being inflated. Compare prices on these with various lenders, and try to negotiate them. These fees are supposed to be told to you up front, but sometimes are conveniently “forgotten” in the shuffle. A good lender doesn’t “forget” important paperwork, so if this happens to you, consider not going through with the refinancing with that lender—you’re being railroaded.

To guard against this happening, only work with lenders who will tell you their fees up front and guarantee them in writing. Get references from friends and the Better Business Bureau. Never forget that knowledge is power.