The low interest rates in the U.S. have sparked increased interest by homeowners to inquire about the average cost to refinance. Is it worth it?
Refinancing a home loan can improve a family’s monthly cash flow. Refinancing can also reduce the mortgage term for long term savings, and provide ready cash drawn from the home’s equity. However, the process of rewriting a home loan is not free, and knowing the typical refinance costs will be important for anyone thinking about jumping in.
How expensive is it to refinance?
Different lenders and different state regulations will mean different fees, but the average cost to refinance is 2-5% of the loan amount to refinance. There may be other variables to consider that could increase or decrease this estimate, though. One example is a prepayment fee.
If you pay your original mortgage off during the penalty period (usually the first 3-5 years) it can cost as much as 6 months’ worth of extra interest. Before refinancing, tbe sure you’re aware of your current loan’s terms. Do you have a prepayment penalty?
Refinancing comes with many fees. It’s important to understand the average cost to refinance a mortgage before jumping into the process. (Photo/Flickr)
Common fees associated with refinancing
With the excitement of a new interest rate and new, lower, monthly payment will also come a collection of other fees and charges usually lumped into what are called “closing costs.” Let’s look at some of the most typical refinance costs:
Mortgage application fee
This fee will vary greatly from lender to lender, and by the refinance product you chose. For instance, a streamline refinance lender may waive the application fee. However, if you are on the hook for this cost, you should expect to pay anywhere from $200-500 to cover the fee.
Home appraisal charges
Since appraisals are only good for about 90 days, it’s likely you’ll need to need a new appraisal when you refinance – the original quote from your purchase mortgage won’t qualify. The lender may request payment up front to cover this expense regardless of whether the loan is approved or not.
Because of an increased amount of required paperwork and time, appraisals have risen in cost. It is possible to do a no-appraisal refinance, however if you suspect your home has increased in value while simultaneously lowering the overall principal of your loan, an appraisal may help you get a better refinance deal. An appraisal may also help you skip over paying private mortgage insurance. Appraisals can cost upwards of $600. However, a modified, outside-only, quick look, if acceptable to the lender, can be less.
Loan origination fees
Origination fees, or the fee that allows your loan be to created, are often about 1% of your total loan value. This means an origination fees on a loan for $300,000 could be $3,000 or more.
All lenders are different, but the three forementioned fees are the most common. Additional fees that are typical may include:
- Document preparation fees
- Title fees
- Recording fees
- Attorney fees
- Flood certification
- Credit check fee
- Processing fee
As you can see, each of these fees can really add up. You can ask for a good faith estimate from your lender to get a more in-depth look at what a refinance will cost you, before securing a new loan. It’s a nice way to determine if the fees make sense for your financial situation.
Using points for a refinance
Lender’s fees and charges may include paying “points,” or the equivalent of prepaid interest on the new mortgage loan. Usually each point represents about 1% of the total loan value and can lower total interest rates by .25% -.50%. Paying extra points is a way to bring down the overall mortgage interest and can be cost-effective if the loan is to be long term.
Variations in typical refinance costs
Your lender might offer a no closing cost mortgage is also called a zero point mortgage. These options can be a good choice if the property is going to be owned for less than 5 years or the person is short on closing cost cash. A slightly higher interest rate will absorb these otherwise out-of-pocket expenses. This plan does not cover recurring expenses such as property taxes, property insurance, and interest.
How to calculate the breakeven point
Regardless of what type of refinancing product you select, you need to see how much money you can save or if the cost of a refinance will be worth it in the long run. Will you be paying for your loan long enough to reap the reward of a lower monthly payment? Or do you plan to move before you’ve recouped the costs of your refinance? You can calculate your breakeven point with this simple equation:
Total cost of your refinance/the amount of money you save each month from refinancing = how many months it will take to break even from your refinance.
If the amount of months it takes to recoup costs is longer than your loan length, or the duration of time you plan to spend in your home, refinancing will cost more than you should pay.
While refinancing a mortgage can be a smart move, especially in the long term, many applicants have wondered why refinancing is so expensive. The truth is that it is very similar to taking out a mortgage for the first time, with all the same types of fees and charges, which may vary slightly from lender to lender and state to state. It is always wise to contact 3-5 lending institutions for both input and comparison rates before making a final decision. This can be done easily online or by phone.
Also, use a mortgage calculator to compare the expenses of your refinance, including the break even point. This is the best way to decide if a refinance is worth it to you.