When mortgage interest rates drop, it seems that ads for refining mortgages go up. Refinancing a home mortgage simply means you are going to get a new mortgage to replace your old one. Going through the “re-fi” process generally means you have found a mortgage at a lower rate than the one you have now and a re-fi could lower your interest rate, reducing your costs and monthly payments.
What Are Some Things To Consider?
As with any mortgage, you will have a variety of fees to pay. This is the important consideration. You must know what the cost of refinancing your house will be and how long you have to keep your house to recover these costs. For example, if the total cost of the new loan is $12,000 and your monthly mortgage and interest payment is reduced by $375, you would have to stay in your house 32 months to realize $12,000 in savings. In this case, if you did refinance, after nearly 3 years of new payments, you would have recovered your costs.
When you refinance your house, the length of the term of financing may change. This will also affect your monthly payment. If the term is too short, you may end up with increasing the monthly amount and putting a strain on your budget. If the term is too long, you may end up with lower costs, but a much longer time frame. This could force you to make mortgage payments long after retirement.
There are many other factors in deciding to refinance. Consult your financial counselor or lending officer to determine what best meets your needs.
What Does It Cost to Refinance a Mortgage?
What are the costs associated with refinancing a mortgage? The Federal Reserve has estimated that these costs will most likely total from 3 to 6% of the mortgage. As you talk to banks and refinance companies, you will soon learn that some costs are required and others may be negotiable.
Costs that you will most likely have to pay include the following:
Application Fee – Required to have your application processed. Generally, this fee is not refundable even if your loan application is denied.
Appraisal Fee – A new appraisal is needed to determine the current market value of your home, with which a fee is usually associated.
Closing Fees – Charges by attorney or title to company to handle closing. These fees will often vary, so shop around.
Credit Report – Required to prove you are credit-worthy for new mortgage. Your credit situation may have changed since you applied.
Loan Origination Fee – Primary fee due to the lender for creating the loan. It may appear as a separate item, or be shown in points in the fee documents (1 point = 1% of the loan amount).
Title Search/Title Insurance – Lender will require an update on status of your title and ownership, using the same rationale as they did for rerunning a credit report.
Most of these charges are ones you will probably have to pay and are less negotiable than the next group.
Costs that you may or may not have to pay:
Discount Points – This is a charge for obtaining lower mortgage rates and is generally optional.
Document Preparation Fees – Fee for preparing legal and loan documentation.
Underwriting – This is similar to a loan origination fee, except that it comes at what basically is the end of the process. Generally, it pays for a lower interest rate.
Wire Transfer Fees – Fees charged by banks for moving money electronically between banks at closing. Know what your bank charges for an EWT, since this is one fee that is commonly marked up.
There can be other costs associated with refinancing. These are just some of the most common fees. Prior to closing on the refinance loan, you will receive a HUD-1 and a Good Faith Estimate. These two documents will summarize and provide information on all the fees involved in your specific loan.
Always do your research before you enter into a refinancing agreement and remember that that some of these fees are negotiable; just remember to ask.
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