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My bank Freedom Mortgage is offering me to refinance my townhouse and to also get rid of my insurance payment that I pay monthly.

Currently I pay $1400 including the insurance payment at an interest rate of 4.7%.
My bank is offering me a rate of 4.5%, and a monthly payment of $1225, and they are also offering to pay for all of the closing costs.

This is very good for me, but since I am not an expert on this, I would like to get and advice if there is any hidden charges later or I can go ahead with not problems. I know banks have to make some money from this, but I want to get benefit from this offer.

Should I go ahead on this offer?

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    As compared to your current mortgage, how many more months will the new mortgage last? Commented Sep 22, 2015 at 17:24
  • What kind of "insurance payment" are they offering to get rid of? Is it "mortgage insurance"? I hope it is not "homeowner's insurance" or "hazard insurance".
    – Jasper
    Commented Nov 22, 2015 at 23:36

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The usual rule of thumb is that you should start considering refinance when you can lower the effective interest rate by 1% or more. If you're now paying 4.7% this would mean you should be looking for loans at 3.7% or better to find something that's really worth considering.

One exception is if the bank is willing to do an "in-place refinance", with no closing costs and no points. Sometimes banks will offer this as a way of retaining customers who would otherwise be tempted to refinance elsewhere. You should still shop around before accepting this kind of offer, to make sure it really is your best option.

Most banks offer calculators on their websites that will let you compare your current mortgage to a hypothetical new one. Feed the numbers in, and it can tell you what the difference in payment size will be, how long you need to keep the house before the savings have paid for the closing costs, and what the actual savings will be if you sell the house in any given year (or total savings if you don't sell until after the mortgage is paid off).

Remember that In addition to closing costs there are amortization effects. In the early stages of a standard mortgage your money is mostly paying interest; the amount paying down the principal increases over the life of the loan. That's another of the reasons you need to run the calculator; refinancing resets that clock.

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  • Don't fully agree with the last paragraph. Specifically "refinancing resets that clock". Refinancing has nothing to do with it. Its simple maths and there is no advantage or disadvantage. The only items matter is the closing costs, fees, additional lock-in periods if any, etc.
    – Dheer
    Commented Dec 22, 2015 at 6:58
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    @dheer: In a constant-payment loan, early payments go mostly to interest rather than building equity. That balance shifts as the loan is paid down until, at the end, payments are going mostly to principal. Refinancing creates a completely new loan for the remaining balance, which follows the same pattern ... so, yes, normally that does get reset. The exception would be if you refinance to a lower rate while keeping a higher payment, in which case you are making additional principal payments from the beginning in order to pay off the loan more quickly....which is less common.
    – keshlam
    Commented Dec 22, 2015 at 13:38

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