Understanding Mortgage Refi Costs
Refinancing a mortgage loan involves paying off the original mortgage and taking on a new one. In other words, you are "trading" your original mortgage loan for a new loan, usually to obtain a lower interest rate or more favorable terms.
But a mortgage refi is not always a good idea. Sometimes, a refi will cost more money than it will save you. In such cases, the refinancing costs will exceed the amount you save (through lower interest rates), thus making the refinance a bad financial move.
So how do you know if a mortgage refi is right for you? By understanding the full cost of refinancing the loan. Once you learn how to determine refinancing costs -- and you're able to compare those costs to your long-term savings over the life of the new loan -- you will know whether or not refinancing is the right thing to do.
What Makes Up Refinancing Costs?
If you remember back to the day you closed on your home (and took on your original mortgage loan), you will remember paying for closing costs. Many of these same closing costs will apply to your mortgage refi as well. These refinancing costs and fees will vary from one refi to the next, depending on the type of new loan, the borrower's qualifications, etc. With that said, here are some of the refinancing costs you are likely to encounter:
* Mortgage Application Fee - Regardless of the exact nature of your mortgage refi, you will almost always encounter an application fee. The mortgage lender charges this fee to cover the upfront cost of reviewing your loan request, checking your credit, etc. Mortgage application fees usually range from $100 to $350, so be sure to ask about them in advance.
* Origination Fees - In most mortgage refi situations, you will also pay a fee to have the loan processed. This is known as the origination fee, and it's usually expressed as a percentage point of the overall loan amount. For example, if your new mortgage is for $100,000 and the lender charges you a one-point origination fee, the fee would equal one percent of the loan amount or $1,000. The lender may allow you to finance this fee by adding it into the loan amount, as opposed to paying the fee up front.
* Title Search and Insurance - Before offering you a mortgage refinance, your chosen lender will examine public records to ensure that you own the property (just like when you took on the original mortgage). The initial cost of your title insurance policy is usually combined with this fee as well. The combined cost of this mortgage refi item usually averages between $400 and $700. As always, ask your refinance lender for the exact amount in advance.
* Attorney Fees - The mortgage lender will have an attorney review all documents during the closing / settlement process. While this process always takes place, different lenders handle the costs in different ways. Some lenders pay it themselves (for competitive reasons), while others pass the cost on to the borrower. This fee may range from $100 to $300 or more.
* Appraisal Fee - Like most refinancing costs, this is another fee you also encountered when you took on the original mortgage loan. Lenders will have the property appraised in order to ensure that it is worth the amount you paid for it. If your mortgage refi is through the same lender that gave you your original mortgage loan, you might not have to have the home appraised again. Appraisal fees range from $150 to $450.
* Prepayment Penalty - Some lenders charge a penalty fee if you pay off your mortgage early. This is referred to as a prepayment penalty, or an early pay-off fee. This fee would have been part of your original mortgage loan terms. Prepayment penalties can sometimes be steep, and they are therefore a common reason that people decide against mortgage refinancing. Refer to your original mortgage document to see if there is a prepayment penalty, and how much that penalty is.
* Other Refinancing Costs - This list of mortgage refi costs is not all-inclusive. Depending on the type of loan you currently have, and the type of refinance you're applying for, you might encounter refinancing costs not mentioned in this article. The important thing is to get all of the costs in advance, before you even apply for a mortgage refi.
Mortgage Refi Calculator - Determining the Break Even Point
Now that you have a better understanding of refinancing costs, you can calculate your "break-even" point to determine whether or not a mortgage refi is right for you. The break-even point (or BEP) is an important concept to grasp. Basically, the BEP comes from comparing the costs of refinancing to the amount of money you will save in the long term, after the mortgage has been refinanced.
You should only refinance a loan if the money you save exceeds the money you pay in costs and fees.
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