If you are considering refinancing your existing mortgage, it is important to understand the costs and fees you'll have to pay and how long it will take you to recover those costs.
Refinancing is similar to applying for an original mortgage, so you can expect to pay similar costs. Some of these costs may include:
- An application or processing fee, which covers the lender's cost to process your application.
- A fee for a title search of the public record of ownership of your property.
- A lender's title insurance policy, which protects the lender from losses due to a discrepancy in the title (you may be able to save money by having your title insurer re-issue your current title policy at a reduced rate).
- A fee to have your property appraised.
- A new survey of your property to confirm that no changes to the land or physical structures have been made that would adversely affect its marketability.
- A loan origination fee, which covers the lender's work in evaluating your loan. It is usually expressed as a percentage of your loan amount.
- Other fees, depending on the type of mortgage refinancing you are seeking, may include a funding fee for VA-guaranteed loans, an up-front mortgage insurance premium for FHA-insured loans, or a premium for private mortgage insurance.
Other Costs and Considerations
You may choose to hire your own attorney to review documents and to represent and guide you through the stages of your refinance transaction. If you do, you will have to pay your attorney out of your own pocket.
Some refinance costs may be waived under certain circumstances. For example, an appraisal may not be necessary if you refinance with your original lender. Or you may be able to get some fees — such as the title search fee and loan application fee — lowered or eliminated through negotiation, especially if you refinance through your original lender or your current servicer.
If you have additional cash for closing, you may be able to reduce your interest rate by paying discount points to buy down your rate. Each discount point equals one percent of the loan amount (for example, one point on a $150,000 mortgage equals $1,500). As a general rule, each point that you pay typically will reduce the interest rate offered by the lender by about one-eighth of one percent, or 0.125%. The general rule is that it takes about 5 years to 7 years to recover the cost of points paid at closing.
Be sure to review your loan documents to determine whether your existing loan is subject to a prepayment penalty. Many states limit this penalty or prohibit it altogether, regardless of the provisions contained in your loan documents. You may wish to contact the appropriate state regulator for information about the laws of your state and whether prepayment penalties can be enforced in your state.
You may be able to save money by comparison shopping. Talk to more than one lender and select the one that best meets your refinancing needs at the lowest cost.
You also may want to check with your lender to see if "no-cost" financing is offered. Under this plan, you don't pay many of the typical upfront costs, but the interest rate on your mortgage is typically higher.
Recouping Your Costs Over Time
An important question to ask before starting the refinance process is, "How long will it take to recoup the up-front costs of the refinance?" In some cases, you may have to remain in your home for several years before you recoup these costs. So if you plan to move in the near future, refinancing now may not be cost-effective for you.
To determine if you're likely to recover the costs of a refinance transaction within an acceptable amount of time, you can divide your total refinancing costs by your total savings in monthly mortgage payments. This will show you approximately how many months it will take to recover your up-front costs through your lower monthly mortgage payment. If you find it would take longer to recover your costs than you plan to remain in your home, you may not want to refinance your mortgage. Your lender or mortgage broker can help you make this decision.
