If you plan to live in a house longer, you may consider refinancing with a difference smaller than 2 percent. Since most lenders handle refinancing as a new mortgage, settlement or closing costs are incurred. Special attention should be given points that are an up-front fee collected by the lender, with each point equaling 1 percent of the loan amount. Charging points is a technique lenders use to adjust interest rates. The lower the interest rate the more points you normally pay.
Many lenders routinely offer two or more choices of point-interest rate combinations.
For example, you may be offered a choice between an interest rate with 2 points or a half a percent higher with no points. Consider any prepayment penalty applied to your existing mortgage. Prepayment penalty is an extra or additional percentage of the balance you must pay if you pay off the loan early. Generally, prepayment penalties apply only to the first 5 years of the loan life. Calculate your breakeven period-the time it takes to recover the closing costs and begin to save money from the lower payments.