In today?s low interest rate environment, why would a bank agree to refinance a mortgage? After all, the loan will be locked at an exceedingly low interest rate meaning that, if inflation goes up in the future, the bank will actually end up losing money. Today, many lenders make their money not off of lending money but off of the fees that they charge to make loans.
For a typical mortgage refinance where the borrower does not pay ?discount points,? fees typically run between two and three percent when they are all added up. While this may seem like a great deal of money, comparing the one-time fees to the total interest savings makes the benefit of a refinance much clearer. In addition, many refinances can be structured where the borrower does not pay the fees out of pocket, further blunting their impact.
Average Cost to Refinance and Pay Off an Old Mortgage
While most of the cost involved in a refinance comes from originating the new loan, paying off an old one typically carries at least one of the following two fees:
- Reconveyance fee. A reconveyance fee is the fee that a lender charges to formally give up their ?right? to your property so that your next lender can take it as collateral. This fee is typically minimal — in the neighborhood of $100.
- Prepayment penalty. While most traditional fixed-rate mortgages do not carry prepayment penalties, some jumbo and sub-prime loans do. These penalties vary wildly depending on the actual rate and terms of the loan getting prepaid.
Average Costs for Refinancing
Lenders, originators and third-party vendors charge a vast range of fees to place a new loan. These fees fall into a few groups:
- lender fees
- title and closing fees
- prepaid expenses
The exact refinance cost average that lenders charge varies depending on the lender and the type of loan. They generally levy small charges for such things as accepting an application, issuing a credit check and generating the loan paperwork. Some also charge an origination fee, which is a percentage of the total loan amount.
Appraisal fees go to a third party appraiser that looks at the property being mortgaged and estimates its value. Typical appraisals are between $200 and $400.
In most states, a title company or a title company and attorney handle the process of actually getting the loan closed. They coordinate getting the paperwork together, getting signatures, and sending the money to the right place. A title company also ensures that there is no one else that might be able to lay claim to the property and harm the owner’s or lender’s right to it. They charge for all of these services.
Finally, some loans will require that some expenses be prepaid. For example, they may call for premiums on property or mortgage insurance. Others require that a portion of interest be paid upfront, as well.
Optional Discount Points
Some loans allow the borrower to “buy the rate down” by paying discount points. For example, if a borrower pays one percent of the loan as an upfront fee, the lender would reduce the rate by 0.25 percent. After approximately four years, the borrower would have gotten their money back and would have 26 additional years of payments at the lower rate. Discount points can be a good investment for borrowers who know that they will be holding on to the property and its mortgage for a long time. These costs are not usually included in the average refinance fees for a new mortgage.
Paying The Fees
There are typically three ways to pay refinance fees – in cash at closing, by adding them to the loan balance, or by having the lender pay them in exchange for charging a slightly higher interest rate. Most borrowers opt for one of the latter options to conserve their personal cash reserves. All three can be appropriate, though, depending on a given borrower’s specific situation.
Even after all of the fees, refinancing usually nets significant savings. As long as a borrower can reduce their interest rate by at least 100 basis points, or one percent, they will almost always come out ahead doing a refi. Some borrowers who refinance away from high-rate subprime loans can come out ahead in less than one year!
Ultimately, most borrowers need help in choosing the right type of refinance mortgage and the right way to structure it. A qualified mortgage broker can do this for borrowers. They also help to streamline the paperwork, and get the loan closed more quickly. With their help and today?s attractive low rates, just about anyone can save a great deal of money on their mortgage.
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