Mortgage refinance is taking out another loan to replace your existing mortgage – you know that. However, there are two things which you may not know about it that can mean the difference between a good financial move and a disastrous one. Read on to find out what these two things are.

You PAY to Refinance

Yes, you will pay to get your home mortgage refinanced. Refinancing your home mortgage is like taking out a brand new mortgage. This means that you will have to pay some upfront fees that are similar to what you paid when you took out your original mortgage. The origination fee (or the upfront loan closing cost) is one of the one-time fees which you have to pay for a home refinance. This is also known by the term “origination points” because the one-time loan closing cost is typically expressed in points – one point being equivalent to one percent of the total loan amount.

In some cases, your lender may forgo charging origination points in exchange for higher interest rates. Your lender can also charge you a separate loan processing fee to cover the cost of processing your loan. You also have to pay your attorney. You may also incur home appraisal fees, government certification fees, and taxes among other things.

Finally, you also have to look out for penalties from your original mortgage lender. Your contract may have a clause stating that you would be penalized if you pay off your mortgage earlier than your stated loan period.

Lower Rates Are NOT Always Better

Generally, you should choose a refinance plan that will give you an interest rate lower than your current mortgage’s rate. However, this rule is strictly applicable only when you are replacing a fixed-rate mortgage with another fixed-rate mortgage. If you have an adjustable rate mortgage, however, it might be better to exchange a current mortgage with a low interest rate for a home refinance loan with a higher rate of interest. An adjustable rate mortgage’s (ARM) interest rate is typically composed of an index rate (this can be the London Interbank Offered Rate, Constant Maturity Treasury Index, the Cost of Funds Index, etc.) plus the lender’s fixed marginal rate (this can be 1%, 2%, 3%, etc.). In such a setup, your actual interest rate will vary with the index to which it is tied.

Thus, if the index rate for your mortgage is on a continuous, upward climb, you may have to refinance your mortgage now. That is to say it may be wiser to settle for a refinance mortgage with a relatively high but FIXED interest rate than to continue paying for a mortgage with a currently low but VARIABLE interest rate. The former may give you a high interest rate now, but you’ll have a constant rate of interest. On the other hand, the latter is uncertain; your actual interest rate may be low now, but it might become very high in the future. Thus, in cases where security is your priority, you may have to sacrifice low interest rates for certainty.

Remember these two things before you refinance your mortgage. First, compute how much you’ll have to spend on a home refinance before applying for one – you may end up incurring more costs than what you were promised you’ll save. Next, study the market conditions to know whether you should refinance your mortgage to get a secure but relatively high interest rate or stay with an uncertain but relatively low interest rate.