Estimate Costs Before Committing to a Refinance

A low interest rate may tempt you into refinancing your home loan. If current mortgage rates are lower than the rate on your mortgage, you'd save money by refinancing, right? Not always. When considering a refinance, some homeowners forget to factor in the costs of the new home loan. The costs of the new loan can negate potential savings, particularly if you intend to sell before your monthly savings can make up for the costs of refinancing a home--so it pays to estimate costs and shop carefully before proceeding.

Don't be surprised if your new mortgage carries most of the same costs as your initial purchase mortgage--including an appraisal, processing fees, and loan closing costs. A sampling of these costs and fees:

  • Licensed appraisal fee: $250 - $600
  • Loan application fee: $75 - $300
  • Land survey fees: $124 - $300
  • Attorney's fees: $75 - $200
  • Title search and insurance: $400 - $600

In addition, you will need to pay closing costs such as transfer taxes and recording fees. Closing costs vary by locality but might be 3% to 5% percent of the home's value. Often, homeowners can wrap their closing costs into the new mortgage, but doing so will increase the loan amount.

Some additional considerations for refinancing could include:

  • Early payoff penalties: Some mortgage companies charge a fee if you pay off your current mortgage in full. Check to see if your home loan carries a prepayment penalty before obtaining a mortgage refinance--this could change the calculation.
  • Remaining balance or interest costs: Find out your final loan pay-off amount before proceeding with a mortgage refinance. This is typically not the amount shown on your latest bill, since the final pay-off may include some additional interest charges or other fees.

Several factors influence the overall cost of refinancing and how you think about them. When evaluating your application and estimating your fees, a mortgage broker or lender will consider the following:

  • The length of time you have owned your home. Your past record of payment reflects your ability to pay on time. Some lenders even place guidelines on how long you must be in your home before refinancing.
  • The remaining balance on your original mortgage. The typical rule of thumb is the higher your remaining balance, the higher the refinance cost will be.
  • The value of your home in today's real estate market. This will be one of the key elements to determining your refinancing costs and your ability to refinance. Your current home value can be much higher or much lower than the original purchase price, with implications for your level of home equity.

As with your purchase mortgage, financing costs vary according to individual circumstances. Each geographic area, lender or broker, and housing market will have different policies and fees.

When deciding if a mortgage refinance is right for you, compare closing costs and fees with various lenders before signing any documents. Find out if you can wrap costs into your loan or if you have to pay the costs upfront. Most of all, calculate how long it will take before your monthly savings surpass the costs of refinancing to make sure a refinance is in your best interest.