Mortgage Counseling: Know Your Loan

On the surface, applying for a home loan refinance might appear to be a no-brainer. After all, who wouldn't want a reduced interest rate and lower monthly payments? But, as with most things in life, looks can be deceiving. For the same reason you wouldn't marry someone based solely on his or her looks, several factors should be taken into account before diving into a lengthy relationship with a new loan:

Is its beauty only skin-deep? Again, there are several features that make a home loan refinance attractive on the surface. But once the initial attraction wears off, you'll still have other factors to deal with. You'll probably be charged application, origination and legal fees; you'll likely have to pay for an appraisal, a title search and insurance; and depending on the deal you worked out with your previous lender, there might be a penalty for paying off your old loan early. When you compare these added costs to your perceived savings, are you really getting what you bargained for?

Are you ready for commitment? If you've really settled down and don't plan on moving anytime soon, lowering your interest rate with a home loan refinance will definitely pay off in the long run. However, if you're the commitment-shy type who will likely move on in two or three years, the aforementioned costs of securing the loan might make it a waste of time and money.

How well do you know your loan? Simply looking at a loan's interest rate probably won't give you enough information to determine your compatibility. For example, the amount you pay over the life of the loan will be determined by the term's length. So even if the rate of a 30-year home loan refinance is lower than that of a 15-year loan, it won't necessarily cost less money in the long run. Other factors include whether the rate is adjustable or fixed and if there are any ongoing fees.

How will the little write-offs fare? If you write off mortgage interest at tax time, take into consideration that a lower rate will mean smaller write-offs. While the difference probably won't be enough to offset the savings, it should be taken into consideration to avoid any surprises.

When will you get back what you put in? Although a home loan refinance will almost always save you money in the long run, you might want to get a general idea of when you'll start feeling the savings. After adding in the additional costs and fees, how long will you be paying before you reach a break even point? Six months? Three years? The answer could be a big influence on whether you want to take the plunge.