Are Refinance Fees Worth That Low Rate?

The costs associated with refinancing your mortgage can be a tricky proposition. You really would like to lower your monthly payment, but you’re wondering whether you should raise your current loan balance and go deeper into debt.

After all you’ve worked hard to pay extra money on the principle to further reduce that balance so there is a natural hesitation to take on added costs. Now, refinancing will in fact raise your current loan balance, but does that necessarily mean that you go deeper into debt?

Is true debt the actual money you currently owe or the total number of dollars you’re on the hook for? It sounds like both can be the same difference but let’s take a closer look.

Remember your mortgage monthly payment is based upon interest that is pre-calculated and pre-determined over the anticipated life of the loan. In many instances this mortgage loan lifespan is 30 years. Extra payments will in fact reduce this total pay back amount but you still end up paying back much more than what you actually owe. This total pay back amount regardless of whether you’ve posted additional payments is in reality your total mortgage bill. So the true question of cost when considering a refinance should be how much are you going to pay back? Or perhaps how much will the new refinance costs impact that total payback amount?

Any homeowner who makes additional payments on their existing mortgage balance is obviously interested in shortening the mortgage debt. However, the key to sharply reducing mortgage debt is not hinged upon your mortgage balance but rather the pace at which interest accrues on your principle. This pace is your interest rate and the quicker the pace, the heavier your total bill. Conversely, a lower rate is a slower pace, which means a smaller total bill. Your total bill is the dollar amount you actually end up paying back.

Interest on your mortgage is like a meter. It’s pesky and accrues daily. The meter will keep running on any unpaid principle. If your interest is ticking at a rapid pace you can take a shortcut by paying extra to get to your destination quicker. The destination obviously is a zero balance.

Your hesitation to absorb the cost of refinancing in a new loan should be balanced against the total cost of not refinancing. How much less will you pay back if your new loan absorbs the costs? This is the true refinance litmus test to determining if it actually does make sense to refinance. You should also ask yourself:

·Will refinancing allow me to reduce my mortgage balance quicker?
·Will I pay back thousands less by refinancing into a the new loan by making the same payment I’m making now?
·Will refinancing cause me to pay less monthly and less years?

If the benefit is marginal, then you simply shouldn’t do it, even if the cost were zero. The new loan should accomplish something tangible that you can’t already accomplish with your current mortgage loan. Make sense?