Usually, the goal of
refinancing your mortgage is to save money. The hope is that you will end up
with a lower interest rate than you had initially, thus making your total
payments lower. Unfortunately, the process of
refinancing
your mortgage involves costs that may make this goal a little more difficult to
achieve. Fees will often amount to 3-6% of your outstanding principal.
Common Refinancing Fees
Every state and lender is going to have
different fees that they will require of you. Many of them are designed to
protect the lender’s investment in your home. Some are more common than others.
Here are a few of them and their approximate costs:
- Application Fee: The cost of applying for refinancing, including
obtaining a credit
report and other initial considerations is the first fee you’ll pay. You may
have to pay this whether or not you qualify for or choose to undergo refinancing
at all. $75-$300
- Loan Origination Fee: This is the cost of putting the new loan
together. 0-1.5% of your principal
- Appraisal Fees: Your lender is going to want your home
appraised. If you’ve recently had an appraisal, you may be able to negotiate
with the lender to accept the information you already have. $300-$700
- Inspection Fees: Whatever inspections the lender wants to conduct
(e.g., for termites or structural flaws) will be included in your costs.
$175-$350
- Attorney Review/Closing Fee: Whoever conducts the closing will
probably be paid out of your pocket. $500-$1,000
- Homeowner’s Insurance: Lenders will usually require you to have
homeowner’s insurance at the time of refinancing. $300-$1,000
- Title Search/Title Insurance: The lender will charge you for the
labor of searching your home’s records to verify that you are the owner and to
check for liens. Insurance may be purchased to protect the lender against error
in their research. $700-$900
- Survey Fee: The lender will want to confirm the location of your
property and the structures on it as well as any improvements you have made.
Like the appraisal fee, this may be avoidable if a survey of your home has
recently been conducted. $150-$400
- Prepayment Penalty: Like an early termination fee, your original
lender may penalize you for paying your mortgage off earlier than the period
previously agreed upon. One to six months’ interest
Paying for the Costs
You’ll need to factor in the amount of
money these fees will cost you when you compare a refinanced loan to your
current situation. The costs can, in some cases, make the whole thing no longer
worth it. If possible, it’s advisable to pay these fees up-front in cash. If you
decide to finance these fees along with your new mortgage, it will distort the
true amount you are saving in the long-term, as you will be paying interest on
these costs in addition to the principal of the loan on your home.
Amortization
Make sure that you
understand how your old and new loans are being amortized. If you undergo
numerous refinances or perform one relatively soon after your initial mortgage,
you may end up paying almost entirely for insurance. If you have little-to-no
equity in your home, refinancing may be an unwise decision, as your amortization
schedule will start over again from the beginning. At the start of a loan, your
monthly
payments are mostly paying off insurance and not principal.
Long-Term Savings
Since you are starting a new loan from scratch
when you refinance, you’ll want to take into
account
how much you will have paid over the course of the combined lifetimes of your
loans. While you may be able to lower your interest rate (and, therefore,
monthly payments) with a refinance, the impact of restarting a new loan period
may be that you pay more money in total. That is, if you have paid off 7 years
of a 30-year mortgage, and you refinance for another 30 years, the combined 37
years of payments could be a lot more than if you had stuck with your original
mortgage, even if it had a higher interest rate.
Refinancing is a pretty
big decision. You’ll want all the information you can get about your current and
prospective
mortgages, so you can compare them side-by-side and see what kind of savings
you are going to get.