Refinancing your mortgage can mean great savings for you and your family. Replacing your existing mortgage with a lower interest loan, changing the term of your loan, or even consolidating all your debts into this new loan could save you money, both monthly and over the life of the loan.
The rule of thumb is when interest rates are 1.5 to 2% lower than you are currently paying on your mortgage, it’s time to consider refinancing.
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make financial sense for everyone. There are a number of items to consider, such as how long you plan to stay in the house. Most sources say that it takes at least 3 years to fully realize the savings from a lower interest rate, given the costs of the refinancing.
Refinancing can be a good idea for homeowners who:
Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
Want to build up equity more quickly by converting to a loan with a shorter term.
Want to draw on the equity built up in their house to get cash for a major purchase or for their children’s education.
What Are the Costs of Refinancing?
Costs can vary significantly from area to area and from lender to lender, so the following are estimates only. Your actual closing costs may be higher or lower than the ranges indicated below.
Application Fee $75 – $300. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.
Appraisal Fee $150 – $400. This fee pays for an appraisal, which is a defensible estimate of the value of the property.
Survey Costs $125 – $300.
Homeowner’s Hazard Insurance $300 – $600.
Lender’s Attorney’s Review Fees $75 – $200. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender.
Title Search and Title Insurance $450 – $600. This charge will cover the cost of examining the public record to confirm ownership of the real estate, and the cost of an insurance policy.
Home Inspection Fees $175 – $350.
Loan Origination Fees 1% of loan. The origination fee is charged for the lender’s work in evaluating and preparing your mortgage loan.
Mortgage Insurance 0.5% – 1.0%. Depending on the type of loan you have and other factors, another major expense you might face is the fee for private mortgage insurance.
Points 1% – 3%. Points are prepaid finance charges imposed by the lender at closing to increase the lender’s yield beyond the stated interest rate on the mortgage note. One point equals 1% of the loan amount.
Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The mortgage documents for your existing loan will state if there is such a penalty. In some loans, you may be charged interest for the full month in which you prepay your loan. In the future, always make sure there is NO prepayment penalty.
A homeowner should plan on paying an average of 3 – 6 % of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.
Whether or not that is a wise decision is purely a numbers matter.