What’s the value of a mortgage refinance? It depends. In a mortgage, you pay for three things. You pay back the principal of the loan, you pay the interest, and you pay closing costs. In a refinance, the principal of the loan is no negotiable-you’re already in the home and you’re not purchasing something cheaper or more expensive. The interest rate that you’ll be refinancing at is usually the deciding factor. Right now, interest rates are at historic lows, and you’ll likely find an amazing deal around every corner. The marketplace hasn’t been this friendly for decades. If you’re considering a mortgage refinance, it’s the third item-the closing costs-that must be evaluated.
Many potential buyers believe that closing costs are almost negligible, and when they compare mortgage rates, they often ignore the added fees that closing costs can create. Comparatively, the closing costs are often minimal when viewed next to the down payment or the cost of the interest over time, but when viewed separately, these fees can add up quickly.
Average closing costs vary by state, but they can often be in excess of $6,000 dollars. That’s enough to buy a well-maintained car. Many people see a mortgage refinance as a way of simply reducing the interest rates on their loans. They forget to consider closing costs, which can often amount to quite a bit.
Even with high closing costs, a mortgage refinance at today’s low interest rates will almost certainly save you substantial money in the long run. But be aware of all the expenses and all the variables that go into the refinance transaction. Don’t jump in without doing some research.