With the recent drop in mortgage rates (Zillow Mortgage Marketplace reported 3.92 percent for a 30-year-fixed in the last week), you may be thinking about refinancing to take advantage of lower rates. Refinancing is essentially paying off an existing loan with a new loan, using the same property as collateral. When refinancing, you will go through the same process and incur the same types of costs as you did when you financed your home the first time. So, sometimes a refinance can cost you more money than it will save you. If you’re not sure if you should refinance, take a look at the following questions to help you make your decision.

1. What are your reasons for refinancing? The type and terms of your loan will depend upon your refinancing goals.
   • Do you want to save money with a lower interest rate?
   • Do you want to lower your monthly payment by stretching out your remaining loan term?
   • Do you want to switch from an adjustable-rate mortgage to a fixed-rate mortgage so your monthly payments are consistent?
   • Do you want a shorter loan term so you can build up more home equity?
   • Do you want to use your home equity to get cash for your children’s education or a major purchase?
2. Will it be worth it to refinance? If your current mortgage interest rate is at least two percentage points higher than the market rate, it usually makes sense to refinance in terms of costs versus savings. However, it depends upon how long you plan to stay in your house. Generally, it takes a minimum of three years to offset the costs associated with refinancing.
3. How much home equity do you have? Most banks require a certain amount of equity in order to refinance your mortgage.
4. What is your credit score? A low credit score will affect your ability to obtain refinancing and the interest rate you will get.
5. What is your property value? If your property value has dropped, you may not be able to refinance unless you have been paid down your mortgage substantially.
6. Does your existing mortgage have prepayment penalties? Any prepayment penalties should be considered against the potential savings you may obtain from refinancing.
7. What are the costs of refinancing? Typically, you will encounter the following fees when refinancing:
   • Application fee – covers the initial loan processing costs and your credit report assessment.
   • Title search and title insurance – covers the cost to confirm your ownership of the property, and the cost of a policy. Ask your title company if you qualify for a refinance rate in order to save additional money.
   • Lender’s attorney’s review fees – covers the lender’s lawyer fees for conducting the closing.
   • Loan origination fees – covers the lender’s work in evaluating and preparing your loan.
   • Discount points – are prepaid finance charges the lender requires at closing, depending upon market conditions and the interest rate being charged. One point equals one percent of the loan amount. In some cases, you can add them into the loan amount be financed.
   • Appraisal fee – covers the property appraisal.
8. How many quotes should you get? Mortgage rates and lending standards vary between institutions, so obtain multiple quotes requesting the same terms, as much as possible, for comparison. Make sure to ask each lender for a full disclosure of all points, closing costs, and other fees. Also, ask each lender how long they’ll commit to locking in a rate.
9. How do the quotes compare against each other, and against your existing mortgage? Make sure that your monthly savings will eventually compensate for the refinancing costs.
10. Will the refinanced mortgage have any prepayment penalties? Since you may want to refinance again in the future, if the conditions are right, it might be advisable to avoid future prepayment penalties.

If you’re still not sure whether you should refinance, or if you have additional questions, contact a mortgage broker. They will be happy to answer your questions, provide you with cost calculations, and clarify the refinancing process.