The question of the cost of refinancing your mortgage is simple enough on the surface, but the details and the fees add up and appear before you begin and then over the lifetime of the new loan. You need to look carefully at the costs of a refi before you commit to even formally applying for it.
Paying To Qualify
You will have to pay to initiate a mortgage application fee that could be as much as $500. Your refi is for a new loan contract, and the lender will demand a fee for the privilege of starting a new loan. As with any lending, the bank is interested in the qualities of both you and the property.
Credit reports – You will have to show that you are still in good standing with your creditors. Obtaining copies of your credit reports will cost anything up to $100.
Appraisal report – The property that provides the security for your loan also has to prove that it is creditworthy. The appraisal will also have to confirm that there is sufficient equity to repay the previous loan and cover the new lending, which may cost around $400, and you still do not know for certain that you will get approval for the new mortgage. If there is something wrong with the condition of the property or it just does not have the value that you assumed, it could turn out that you spend $1,000 or more only for the lender to decline your application, ouch.
Cost At Closing
Once everything meets the approval of the lender, there is another round of fees to pay at the time that the loan closes. In fact, this is quite a list if you break it down. You will have an origination fee, document preparation fee, title search and insurance fees, recording fee and a host of lesser fees that add up quickly to around 1.5 percent of your initial loan value or more.
Is it worth additional costs? The answer depends on your objectives: If you want to save money in the long-term, and you have found a new loan package that gives you a lower interest rate the savings of interest payments will cover the extra costs to refinance.
It does not take much of a rate reduction to create savings over the life of a thirty-year loan. Likewise, if you reduce the term from thirty to fifteen years, you will save thousands in interest payments. If you plan to sell long before the end of the new amortization period, it will probably be more expensive to pay the up-front cost of refinancing.
How much can you save? Over the life of a thirty-year mortgage, you can save tens of thousands by shaving just a quarter percent from your current rate. If you experiment with an online repayment calculator, you will find that the amount you can save over the life of a loan is on the order of the original balance of the loan, depending on your choices for interest rate and amortization it may be more, or less. If you compare that to the costs detailed above you can see that the key is that re-fi saves in the long term, but it is expensive in the near-term.