There is a current popular interest in mortgage refinancing, thanks to the plummeting interest rates from the outset of the controversial Brexit vote. The Federal Housing Finance Agency (FHFA) also offered extended refinancing opportunity to over 300 000 Americans when it recently announced the extension of the Home Affordable Refinance Program® (HARP®). Wherever you stand in the opportunity boulevard, you should first ask yourself this one question before considering refinancing: Is it practical?
Refinancing entails cost that might surprise you if you are not familiar with the process. Before you dent your savings because of unexpected fees, know the basics of refinancing first and how much it truly requires to get a new mortgage for your home.
Refinancing fees are divided into three categories:
- Government Fees
Government-sponsored enterprises that offer and/or manage housing loan programs often charge their own fees. The Department of Agriculture, for example, charges 2 percent of the loan’s face value for mortgage insurance and a 0.4 percent of the remaining principal per year. The Veterans Affairs also charges its privileged borrowers 0.5 percent of the loan cost for refinancing. .
- Lender Fees
From underwriting fees to processing fees, facilitating either purchase or refinancing transaction gives lenders a significant chunk of the refinancing cost. To regulate lenders from overcharging, the Consumer Financial Protection Bureau (CFPB) put a cap of 3 percent as maximum in fees on most loans.This limit includes points paid for lower interest rates and commissions paid to brokers or lead-finders.The limit can reach to 8 percent for loans under $100,000.
- Third Party Fees
Property survey, appraisal, and title searches require the services of third party companies. Unless these companies are affiliated with the lender or the lender retains a share of fees for said services, these same fees are considered exempt from the limit set by CFPB.
In Detail
So what exactly are these fees? Let’s break them into detail.
- Appraisal Report
An appraisal is the evaluation of the property’s value based on factors such as amenities, location, cost of similar properties in the same locality, as well as structural condition. The appraisal report determines whether the property has enough value to qualify for refinancing. If the result shows that your home value dropped and your LTV ratio is higher than what the lender allows, you may have to put in cash to make up for the lacking amount or purchase mortgage insurance. The typical cost of appraisal ranges from $300 to $600.
2. Document Preparation Fee
The usual cost of preparing documents for underwriting is between $200 to $500.
3. Flood Certification
If the location of the home is within an area identified as flood-prone, lenders may require you to pay a flood certification fee of $50 to $150.
4. Loan Origination Fee
The lender requires an up-front fee for processing a new mortgage loan application. It costs 0.5 percent to 1 percent of the total loan value.
5. Mortgage Application Fee
Generally, this is the fee you pay to apply for a new mortgage. The usual cost of a mortgage application fee ranges from $250 to $500.
6. Recording Fee
The government charges a recording fee for the registration of a new real estate sale or purchase. Recording fees vary depending on the location of the property. The typical cost ranges between $25 and $250.
7. Title Search
An amount of $200 to $400 is charged for a title search. A title is a record of the legalities associated with a property. The title search then determines who holds the rights to the property in question and if s/he really has the authority to sell it.
8. Title Insurance
To assure the buyer that s/he holds a valid title of the property, a title insurance is needed. This typically costs $400 to $800, depending on the lender.
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A Necessary Consideration
The true goal of refinancing is to save money. But knowing the above list of fees is just a scratch on the surface. You also need to determine how much you have already paid for your existing mortgage and if the new mortgage you are getting will be able to serve the purpose.
You can evaluate this in two ways:
1. Estimate your closing cost on the new mortgage and compare it with your expected monthly savings to calculate the breaking point.
To explain it simply, let’s say you have $300,000 in principal. Given the cost of closing is 1.5 percent of the principal, $4,500 will be allocated to closing. If the new mortgage will lower your monthly payment from $1,800 to $1,650 monthly, you will save $150 per month, which translates to $1,800 per year. This means you will be able regain the cost of closing within just two and a half years. From this, you will be able to evaluate for yourself whether refinancing is a better option for you or not.
2. Examine the aspects of loan term and interest. The above example shows the break-even point if you refinance to a similar loan term. But what if you choose to refinance to a 15-year fixed interest mortgage? This would mean a shorter time to pay off the loan but a higher payment every month.
Many lenders advise to refinance only when you have not yet paid 10 years or more of your existing mortgage because if you do, you’d most likely end up paying more interest even if you now have lower monthly payments.
To get around this dilemma, you can check your lender statements to:
- determine how much total interest you have already paid in your current mortgage
- add it up to the total interest you owe in the new loan
- compare the resulting amount from (1) and (2) with the total interest amount still due on your current mortgage
- which one is larger? From this number, you can determine whether it is practical or not to opt for a refinance
Today’s low rates are attractive. But is it for you? Make a smart choice. If you’ve determined that refinancing is a wise option,to guide you throughout the refinancing process.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
