Recently, the average rate on 30-year mortgages hit its lowest level ever. Could refinancing be right for you? The answer comes down to the tradeoff between 1) the lower interest rate and monthly payments with a new mortgage and 2) the costs (and time and hassle) involved in getting it. As a general rule of thumb, experts say that a refinance may be worthwhile if it will net a homeowner an interest rate between 50 and 75 basis points lower than their current mortgage’s rate. But it will take a few years for the savings from lower monthly payments to outweigh the initial costs of the new loan.1
What Does Refinancing Your Mortgage Mean?
Refinancing your mortgage refers to obtaining a new mortgage loan to replace your original one. The new mortgage is used to pay off the remaining balance on the original mortgage. This is typically done to allow the homeowner to obtain a better interest rate and lower monthly payments. It is also possible to borrow more than the amount necessary to pay off the balance of the existing loan. Usually the maximum loan amount is 80% of the appraised value of the home. Such “cash out” mortgages usually have a somewhat higher rate compared to one that merely pays off the balance on the existing loan.
6 Common Costs Associated With Refinancing a Mortgage
No matter the terms of your new mortgage, you will want to weigh of all of the costs involved. Below are six of the most common costs homeowners should account for when deciding whether or not refinancing a mortgage is right for them.
Cost #1: Application/Underwriting/Processing Fee
The names for this fee vary, but nearly all lenders charge a fee to cover the costs of processing and evaluating the creditworthiness of your loan application, and to enhance the profitability of making the loan. It is typically a fixed dollar amount rather than a percentage of the loan. Since it essentially provides the lender with profit, it may be somewhat negotiable. This fee is often sizable and varies greatly. One source estimates a range between $300 and $1500.2
Cost #2: Appraisal Fee
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 tends to fall in a range between $300 and $450.3
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.4
Cost #3: Title Insurance
Title insurance will be required by any mortgage lender. It removes the risk of 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. Often the rates are set by the state government. For example, in Pennsylvania, title insurance fees are set by law, with a base fee of $512 (slightly more for new purchases) on the first $30,000 of coverage plus a declining scale of additional fees for higher coverage limits starting at $5.98 per $1000.5
Cost #4: Credit Report Fee
Of course, lenders are going to want to check your credit score before deciding whether or not to lend you money. But since credit checks are not free, lenders will likely charge you a fee to cover the cost. The fee may vary greatly depending on where the lender goes to obtain their credit check and may include some padding to enhance profitability.
Cost #5: Taxes
Depending on where you live, some local or state governments require you to pay taxes pertaining to the refinancing of a mortgage. These could include mortgage tax, realty transfer tax, mortgage recording fees and more. In most cases, these fees or taxes are small. For example, here in Bucks County, PA, the fee to record a mortgage starts at $81.756
Cost #6: Other Closing Costs
Total closing costs will vary greatly depending on the circumstances. In 2018, the average U.S. closing cost (taxes included) was around $5,779.7 In addition to the fees mentioned above, other costs may include FHA or VA fees, survey fees, mortgage broker fees, home inspection fees, land survey fees, attorney fees, notary fees, and settlement fees. You should carefully scrutinize and fully understand all fees before you sit down to sign the closing documents.
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 even fill out an application to start the paperwork, be sure to take into account all of the costs you will be expected to pay towards refinancing your mortgage.
This content is developed from sources believed to be providing accurate information, and provided by Sapient Investments. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered investment advice or a solicitation for the purchase or sale of any security.