Refinancing is still a popular option despite recent mortgage rate increases.
If you're looking to refinance, it's going to be a mixture of good news and
bad news. Say goodbye to your old mortgage and interest rate but say hello
to settlement and loan processing fees. That's right, just because it's a
refinance and not a home purchase loan, doesn't mean you're off the hook. The
same or similar types of fees apply. And those fees can make the deal much
less attractive, so be sure to research closing and loan processing costs
carefully before signing the dotted line.
How much can you expect to pay?
On a traditional refinance, count on paying
approximately 2 to 5 percent times your loan principal in refinancing costs.
For example, let's say you've got $80,000 in principal left to pay on your
original $100,000 mortgage. Multiply the outstanding $80,000 in principal by
2 to 5 percent, and your refinancing costs will probably run somewhere
between $1,600 and $4,000.
Of course, 2 to 5 percent is a very broad range. Fees do vary considerably
between lenders, so be sure to shop around. Just remember to compare the
interest rate, too. Although you'll save on refinance fees with a no-cost or
low-cost loan, the tradeoff is a higher interest rate. Another option is to
fold the fees into the amount of the loan and make a slightly higher monthly
payment, rather than pay the fees up-front.
Higher discount points are the tradeoff for a lower
interest rate. This pre-paid finance charge is what you'll pay at closing to
get a lower rate. One point is 1 percent of the loan amount. Pick and choose
among different combinations of interest rates and discount points, and
select the best deal for your circumstances.
Loan Origination Fee.
Calculated like the Discount Fee at one percent of the
loan amount, this fee covers the costs associated with processing your
mortgage application and completing the loan.
Title Search and Title Insurance Fees.
These are safeguards to ensure you own the property free of any outstanding
liens or claims. Even though a title search is supposed to reveal existing claims,
the lender will require you to pay for title insurance to guard against any errors.
You can save, however, by asking your current title insurance company to re-issue the
present policy. That saves up to 70 percent compared to a new policy.
This pays a professional real estate appraiser to determine
the actual market value of your home. Although required by the lender in
evaluating your application, an appraisal is nonetheless critical because it
will reveal how much home equity, or ownership interest, you have accumulated
through paying off your loan or from changes in the real estate market.
Closing Agent or Attorney Fees.
The lender will pass on fees paid for the services of the closing agent or attorney.
Private Mortgage Insurance (PMI).
Lenders who deal with Fannie Mae or Freddie Mac will charge you for PMI whenever you
finance 80 percent or more of your home's value.
All lenders require a credit check to determine your credit history.
Some mortgages carry penalties for paying off the loan ahead of time.
Remember to scrutinize closing costs carefully and question your lender about
fees that seem too high. Consider the Good Faith Estimate of Settlement Costs
your guide, as a consumer, to the service charges you'll be asked to pay.
The lender or mortgage broker is required by law to provide it after you
apply for the loan. Take your time going over the numbers. Don't let the
lender pad the closing costs with excessive charges for "document
preparation" or "application fees."