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Determining Costs

Determining Costs

 

What You'll Learn

  • Before committing to a refinance, look carefully at your savings relative to the cost of refinancing
  • Refinancing your mortgage typically costs 2 – 3% of the amount you are financing
  • A lower monthly mortgage payment is not the only thing to consider when refinancing

Before you decide to move forward and refinance your mortgage, it’s highly recommended that you do your homework, ask questions, and look carefully at your short- and long-term goals. 

While refinancing your loan into a lower mortgage rate can certainly result in monthly savings, there are other variables to consider.  Refinancing your mortgage is not free and knowing and understanding the costs relative to the savings is essential.  For example:

  • If you’re planning to move in two years, but it will take you three years to recoup the cost of refinancing, it may not make financial sense.
  • If you have 20 years left on your 30-year fixed-rate mortgage and you refinance into a 30-year fixed-rate mortgage, you’ve essentially extended the term of your loan and will pay more interest over the life of the loan as a result.

Refinancing into a more affordable monthly payment may still make sense for your personal situation, but it is important to consider all factors when deciding whether or not to refinance.

 

Tip

If your lender offers you a “no-cost refinance,” keep in mind there is no such thing as a free loan.  Your lender is probably charging a higher interest rate and rolling the closing costs into the loan – likely costing you more over the life of the loan.

In general, it will cost between $2,500 and $4,500 to refinance your loan, depending upon the size of your loan and the state where you live. These costs include your loan origination fee and closing costs and you should be prepared to pay for:

  1. Government recording costs
  2. Appraisal fees
  3. Credit report fees
  4. Lender origination fees
  5. Title services
  6. Tax service fees
  7. Survey fees
  8. Attorney fees
  9. Underwriting fees

Does Refinancing Make Sense?

A quick check to see if refinancing makes sense is to calculate how long it will take to recoup the closing costs on the refinance. Average closing costs are $2,539 – but depend on where you live and your lender. If you’re saving $200 per month on your monthly mortgage payment by refinancing into a lower mortgage rate, it will take you a little more than one year to recoup the costs (200 X 13 months = $2,600). You can do a more detailed analysis using our refinance calculator and by talking to your lender.

If you purchased discount points to buy down your mortgage rate you will have to pay for that cost upfront. Buying discount points can save you significant money over the life of the loan, but whether it makes sense depends on your personal situation. See how paying extra points might lower your rate and learn more about the point of paying points.

 

Key Takeaways

  1. Talk with your lender about how long it will take you to recoup your closing costs through reduced monthly payments

  2. For traditional refinances and cash-out refinances, closing costs will be very similar what you paid when you purchased your home

  3. “No cost refinances” aren’t as the name implies; they will cost you money over the term of the loan

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