The True Cost of Refinancing Your Mortgage
About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
If you’re a proud homeowner, it’s likely you have a mortgage. And if you’ve been a homeowner for a while, you may have heard about and even considered refinancing your mortgage. The average amount homeowners are borrowing has climbed in recent years, jumping from an average of $205,940 in 2007 to $260,390 in 2017.1 With more and more money on the line, it’s easy to see why people may want to jump at any opportunity to lower their interest rates. But before diving in, there are important things to consider before refinancing your mortgage.
What Does Refinancing Your Mortgage Mean?
Refinancing your mortgage refers to obtaining a new mortgage to replace your original one. The new mortgage is used to pay off the original amount owed, and the homeowner is now responsible for paying off this one instead. This is typically done to allow the homeowner to obtain better interest terms and rates.
6 Common Costs Associated With Refinancing a Mortgage
Below are six of the common cost homeowners should be prepared to account for when deciding whether or not refinancing a mortgage is right for them.
Cost #1: Application & Underwriter Fees
Some lenders will require you to pay an application fee to help cover the associated costs of beginning the loan process. This fee will vary by lender, and it is sometimes returned to the borrower once the loan process is completed. It’s unlikely, however, that the fee will be returned if the loan is denied. This fee may also incorporate a loan underwriter, as the lender needs to pay someone to assess your ability to pay back this new loan.
Cost #2: Appraisal Fees
Sometimes lenders will require a new appraisal of your home to help justify the amount of the new mortgage. While you may have had your home appraised when you applied for the original mortgage, it’s likely that the value of your home has changed since then. The property appraisal cost can vary, but the average lands at about $480 for a typical, single-family home.2
If you currently have an FHA mortgage and are looking to refinance with the government’s streamlined FHA refinance mortgage, you may not be required to have your home reappraised.3
Cost #3: Title Insurance
Title insurance is required by any mortgage lender to have, as it helps dissipate any ownership disputes on the property during the term of the loan. While you may have purchased a policy when obtaining your original mortgage, a new policy is required when refinancing your mortgage.
Cost #4: Credit Check
Of course, lenders are going to want to check your credit score before deciding whether or not to lend you the money. But since credit checks are not free to run, lenders will likely charge you a fee to check your credit. That fee will vary greatly depending on where the lender goes to obtain their credit check.
Cost #5: Taxes
Depending on where you live, some local or state governments require you to pay taxes relevant to refinancing a mortgage. These could include mortgage tax, realty transfer tax, mortgage recording fees and more. As you work to account for all the costs associated with refinancing your mortgage, make sure you check in with your local tax laws and codes to see what taxes you may be required to pay at closing.
Cost #6: Closing Costs
Closing costs will vary greatly depending on each homeowner's unique circumstances. For example, taxes are typically accounted for in the closing costs - which vary depending on your location. In 2018, the average closing cost (taxes included) was around $5,779.4 These closing costs may incorporate some of the other fees mentioned above, dependent on how and when your lender prefers to charge you for these services. If you decide to use a mortgage broker to negotiate new financing terms between you and the lender, the closing costs may also incorporate a yield-spread premium, which is typically between 0.25 and 1 percent of your loan.5
Is Refinancing Your Mortgage Worth It?
Deciding to go for a lower interest rate on your mortgage may initially sound like a no brainer, but it’s important to take into account all of the costs associated with refinancing first. If you’re spending, for example, $5,500 on costs to refinance your home, how long will the savings in monthly payments take to make up the difference? If you’re planning on living in your home for the next 10, 20, 30+ years, it could be more than enough time. But if you’re planning on moving anytime soon, perhaps not.
It’s hard to resist the temptation of obtaining a lower interest rate on your mortgage, especially when that could mean saving $100, $200 or more each month in mortgage payments. But before you start the paperwork, be sure to take into account all of the costs you will be expected to pay towards refinancing your mortgage.
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