Prepayment Penalty

• A prepayment penalty, which may last from six months to five years, can severely reduce the benefits of refinancing. Be sure to include your penalty when calculating the loan amount and comparing it against the new one. In addition, include the application fee, title search and title insurance fees, the review fees of the lender's attorney, loan origination fees and appraisal fees. One advantage to refinancing so soon after purchase is that your existing lender may waive some of the fees, such as the appraisal fee. In addition, you will qualify for a reissue rate, which can reduce your title fees by up to 50 percent. The general rule of thumb on refinancing is that for it to be worth it, the interest rate should be more than 1 percent lower than your current rate and you should expect to recoup your closing costs within 12 to 16 months..
  
  

Equity

• When you refinance soon after purchase, you aren't likely to have built much equity. Since you have yet to make much of a dent in your current loan, be aware that you will need to pay a significant amount of money upfront to account for the fees and any difference between the amount owed and what you can borrow. While some lenders may offer no cost refinancing, which boasts minimum or no upfront fees, don't be fooled. The costs are typically spread over the life of the loan or covered through a slightly higher interest rate. Either way, you can typically expect to pay more in the long run when dealing with no cost refinancing.
  
  

Reasons to Refinance

• If you currently have a variable or adjustable-rate mortgage (ARM), refinancing to lock in a stable interest rate reduces the risks associated with a fluctuating market and can give you peace of mind. If your credit rating received a significant boost, such as going from a 650 to a 750, or some bad debt recently dropped from your credit history, it may be a good idea to refinance. Just be sure you refinancing is something that you and your family can afford.