Costs of Refinancing
Refinancing your home is a great way to save money, but there are costs associated with your mortgage refinance. You want to be sure that the savings you get from refinancing surpasses the costs from the new loan. Additionally, if you extend the term of your mortgage it lowers the amount of savings you will receive since you will be paying on their mortgage for a longer period of time. Read on to know good reasons to refinance and find out the true cost of refinancing your home mortgage.
How Much Does it Cost to Refinance?
Settlement Costs
Settlement costs are fees that are assessed at the closing of the loan, they are also known as closing costs. In order to refinance your home you must pay for settlement costs. Below is a list of costs associated with a refinance:
- Appraisal Fee
- Origination Charge
- Application Fee
- Discount Points
- Credit Report
- Flood Certificate
- Tax Service
- Title Insurance
- Recording Fees
- Prepaid Interest
- Escrow Deposit
Some closing costs are regulated by the federal reserve, some are determined by the market that you live in and some vary from lender to lender. For instance an appraisal fee may be higher in California than it is in Oklahoma. Fees like origination and application charges and discount points associated with your interest rate are determined by the lender. Ask your lender for a Good Faith Estimate to get an idea of how much your closing costs will be. Furthermore, find out what your annual percentage rate (APR) will be. The APR takes into account the various closing costs that you will have to pay in order to get your loan. It reflects the true cost of lending.
Break Even Point
Calculate your break even point after getting a clear idea of how much settlement costs will be. A break even point determines how long it will take until the savings from the new mortgage exceeds the cost of getting the loan.
Here’s an example of how to calculate your break even point:
Settlement Costs: $5600
Monthly Savings: $320
Break Even Point= (Selletment Costs/ Monthly Savings) 17.5 months
To calculate the break even point, divide the total of the settlement costs by the monthly savings. The above example illustrates that the homeowners will begin seeing savings after a year and a half of making payments. From the 18th payment and on the reduction in payment is strictly money saved.
Can closing costs be included in a refinanced loan?
Most lenders will allow for closing costs to be rolled into the loan as long as the total loan amount does not exceed the maximum loan to value. Keep in mind that when you roll the closing costs into the loan you will be paying interest on those closing costs over the remainder of the loan. It may still be worth once you make it past the break even point.
While there are costs associated with refinancing a mortgage, the savings in interest far surpasses the costs. Make sure to understand all of the costs of refinancing. Avoid refinancing multiple times so you get the maximum benefits out of your loan.
