When considering refinancing, it's important to compare the cost of keeping your current mortgage with current mortgage refinancing rates. In addition to interest, you'll pay settlement costs, points, and you may also need to pay for mortgage insurance if your loan-to-value (LTV) ratio will exceed 80% after refinancing. 

Refinancing Rates 101: Comparing Costs

Calculating all of the costs and savings potentially associated with refinancing may seem complicated, but it can also help in determining whether or not you should refinance your mortgage at all. In addition to comparing the interest rates of your current and new mortgage loans, you'll want to consider additional costs associated with refinancing that may reduce the   benefits of refinancing simply for the purpose of getting a lower rate. Looking at the big picture involves considering all potential costs that can occur when refinancing:

Cash out refinancing may require mortgage insurance: If your current loan to value ratio (LTV) is less than 80%, you are not required to pay for mortgage insurance. If you refinance to an LTV above 80%, you'll be required to purchase mortgage insurance, which protects the lender in the event you don't make your mortgage payments.  When comparing the cost of a cash-out refinancing for debt consolidation, it's important to know whether or not your new mortgage will require the additional cost of mortgage insurance.

Refinancing includes closing costs: In addition to considering mortgage refinancing rates and comparing them to your current mortgage rate, you'll need to include closing costs in your cost comparison. Although you won't pay any real estate sales commission, you'll have to pay lender fees, escrow or attorney's closing fees and vendor fees including title insurance, recording costs and pro-rated taxes and insurance.  These fees and costs can amount to a few thousand dollars. When you apply for refinancing, your lender will provide you with a good faith estimate of closing costs; this can help in determining the entire cost of refinancing your current mortgage loan.  It may be possible to finance closing costs by increasing your new mortgage amount, but you'll be paying additional interest on a higher mortgage.

What is the "break even" period for refinancing? A mortgage refinance calculator can show you how long you must keep a new mortgage loan in order to recoup the cost of refinancing. If you're planning to sell your home within a couple of years, refinancing for the best mortgage rate may not make financial sense.

Using free online mortgage and refinancing calculator tools can help you estimate savings associated with refinancing to a lower rate, but these tools are meant to provide very general estimates only. If you need to compare more than refinancing rates to your existing mortgage rate, it's a good idea to consult with your financial or tax advisor.

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What Goes Into the Mortgage Refinance Decision?