Have you ever received one of those letters in the mail that tells you how you can save nearly $250 per month if you refinance your mortgage with their company? No closing costs, low rate—sounds great, right? Well, before you sign the paperwork on this, you need to read the fine print. Saving $250 a month sounds great. With the ever-increasing costs of food and other consumer goods, getting a break in the budget can be quite tempting. But how do you know if refinancing your mortgage is a good deal?
There are four major details of the offer that are important to know before deciding if it is a good deal or not:
Rate—Make sure that the low rate the bank is offering is fixed, so that it doesn’t fluctuate after an introductory period. If it is only a three-year fixed rate and then adjustable after that, your $300 per month savings will dwindle quickly once the rate adjusts. In fact, depending on the terms of the loan, the rate can adjust, only a certain amount each year, but could end up being several percentage points higher than the original introductory rate.
Loan Points—Are you having to pay points to buy the rate down to the low rate that is being advertised. If it is going to cost you several thousand dollars, even if the amount is rolled into the loan, then the costs could end up out-weighing the benefits.
Closing Costs—Does $0 closing costs really mean there are no closing costs? While you may not be expected to come up with closing costs out-of-pocket, they may be rolled into the loan or there may even be a large pre-payment penalty if you sell your home or refinance within a certain amount of time.
Term—what they don’t usually point out in big, bold print on those marketing letters is that it in order to achieve the $250 per month savings, you are going back to a 30 year term on your mortgage. If you have already been paying on your current mortgage for 10 years, going back to a 30 year term may actually cost you money.
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