Nick Perry explains why refinancing isn't free money. A new loan resets your amortization schedule, so you pay mostly interest for the first one to two years. Closing costs run $3,000 to $8,000, and refinancing only makes sense if your rate drops at least 0.75-1% and you'll stay long enough to recoup those costs.
Everyone tells you to refinance your home, but nobody tells you the reality of it until it's too late. Look, refinancing isn't free money. It's a new loan that resets your amortization, which means for the first 1 to 2 years, you're mostly paying interest instead of building equity. On top of that, you pay $3,000 to $8,000 in closing costs. See, the only time it makes sense to refinance is if the rate drop is at least 0.75% to 1%. If you're staying in the home long enough to break even on those closing costs, if you're shortening your loan term, or if you're pulling equity to invest in something that makes you more money. So the next time you get one of those letters telling you to refinance, do the math first.
