Refinancing Costs – The Fees Add Up
If you're considering a refinancing, you might have heard the old adage that "a few thousand dollars in savings on your mortgage can translate to $1 million or more in savings over the life of your loan."
But is it really worth all that effort? What are the fees we need to consider before making changes to our loans? Do refinancing fees outweigh any potential benefit?
Let's explore these questions.
Understanding Refinancing Fees
Before we begin, I'd like to point out that there are several ways that you can do a refinancing. You can refinance into another product, such as an Adjustable Rate Mortgage (ARM), Fixed Rate Mortgage (FRM), or Interest Only mortgage. You can also refinance your initial mortgage and make payments on the new loan funded through the sale of your current home. These are all referred to as "Refinancings."
For each type of refinancing, there are different fees that apply. A quick chart comparing the various types of refinancings is found below:
Refinancing Loan Type Cost Interest Rate Fee Fixed 10 Year ARM Refinance $0.00 1.00% Can be financed into new Rate and Term Fixed 15 Year ARM Refinance $0.00 0.50% Can be financed into new Rate and Term Fixed 30 Year FRM Refinance $7,000 + points closing costs to lower interest rate from 5.125% to 4.875% Fixed 30 Year FRM Cash Out Refinance $7,000 + points closing costs to lower interest rate from 5.125% to 4.875% Fixed 40 Year FRM Refinance $11,000 + points closing costs to lower interest rate from 5.125% to 4.875%
Refinancing is generally a very simple process. You provide a copy of your mortgage for the new loan, sign some paperwork and you are on your way. But there are many other details involved beyond just originating the new loan that need to be considered.
Unfortunately, many consumers only consider the lower payment amount and do not take into account the other costs that may be involved.
When I considered refinancing my mortgage a few years ago, I was only concerned with lowering my interest rate and reducing my payments. The thought of getting a new 30 year fixed rate loan seemed like it would be the soundest decision. The problem was that there were additional fees to refinance that I hadn't even considered, such as paying a broker to complete the transaction or paying for an appraisal. These fees add up quickly!
Planning for (and Knowing) Fees
As we can see from the above chart, there are numerous fees involved in refinancing your home mortgage. They can run from $100 to more than $1,000. You've probably heard the saying "the fees add up" when it comes to refinancing. And that's an understatement!
The most substantial fees are generally associated with refinancing a 30 year fixed rate mortgage. At these interest rates, it can cost significant money to refinance your home loan.
The amount of fees vary greatly depending on what type of second mortgage you're getting and what product(s) you're taking out – both of which are determined by the potential savings you have in your refinance. It is important to take time and consider all of the costs before committing to a refinance.
For example, when I refinanced my primary home mortgage, I was able to use the equity in my house to take out a new line of credit. This line of credit was lower than the interest rate on my first mortgage and allowed me to take advantage of a lower interest rate. There were no fees associated with this refinancing, just the cost of refinancing itself. The other substantial benefit to this type of refinance is that there are no prepayment penalties associated with paying off the loan early – something that can be extremely useful if you have an emergency.
Considering the fees associated with a more normal refinance, such as those performed by large banks, you can quickly see how much money you could save. A $25,000 refinance of a 30 year fixed rate mortgage and an initial payment of $1,000 can save you hundreds of dollars. And remember – the costs of refinancing your home loan itself vary widely depending on your individual circumstances.
So let's take a look at exactly what all these fees are and how much they add up to:
Broker Fee: This is generally paid to a broker to complete the transaction. The broker may work for the lender or be independent. Most lenders have their own fee schedule, with the cost of a transaction typically ranging from $1,000 to $2,000. It is important to find out what your broker will charge you.
Appraisal / Home Value Increase Fee: This is typically paid by the lender to acquire a property appraisal that justifies the amount of the refinancing based on current values. This can be as low as $200 or as high as $2,000 or more depending on the size of your home and if it contains any unique features (such as a second story or special remodeling).
Home Loan Originator Fee: This fee is paid to a bank or other lending institution to complete the transaction. You may be charged anywhere from $100 to $500, and this can vary greatly depending on how complex your loan is and how many different parties are involved (such as the mortgage broker, lawyer, appraiser, etc.). The cost of this fee may be covered by the lender or not and is important to determine at the beginning of a refinance.
Advance Loan Proceeds Fees: Also known as "points," these fees are applied in order to fund your new mortgage loan with cash instead of coming from your home equity loan. These fees typically range from 0.25% to one point and can cost anywhere from $250 to $2,000. These fees are used to cover the costs of the lender for originating your loan and also for guaranteeing that your new loan is paid off on time.
Document Preparation Fees: This fee is paid to all parties involved in completing the refinance transaction, typically made up of a sum of several other smaller fees that apply when closing a new home mortgage. The fee can be calculated at some percentage (often 1%) of all the other fees associated with refinancing your loan.
Conclusion
Refinancing your existing home mortgage is an excellent way to lower your monthly payments and to save money. But as we've discussed, there are many costs that go beyond simply locking in a lower interest rate.
What you will find, though, is that overall cost of refinancing can be a lot less than you'd expect. A few things to keep in mind:
Consider all costs associated with refinancing: The cost of refinancing itself includes numerous fees, but the actual costs may be much less than you think! Know the legalese involved: Don't hesitate to ask for advice from mortgage loan originators and lenders when it comes to figuring out which fees apply to your situation.