Costs of Refinancing
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.
For information and educational purposes only.
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