Refinance Costs: To Pay Or Not to Pay?
Most homeowners understand how a refinance could benefit them but many homeowners don’t realize there are various associated fees.
Refinancing your home loan is basically like getting a new mortgage, which means there are costs that come with accomplishing your home loan goals.
The next step after looking into the things to consider before refinancing is to make sure your costs don’t outweigh the benefits and are within the budget to make financial sense.
Let’s go over the possible costs related to a refinance.
Out-of-Pocket Costs (aka “Upfront Costs”):
- Services you cannot shop for:
There are certain service fees that will need to be paid to third parties. There are two categories: (prices are dependent on the Lender) includes:
- Appraisal Fees (usually around $500-$600)
- Credit Report Fees ($50/per borrower)
- Title Fees
- Government Fees
- Services you can shop for:
- Prepaids: These consist of advanced payments on fees associated with your mortgage (property taxes, interest, homeowner’s insurance, etc.). Even though lenders may estimate these slightly differently on your initial Loan Estimate, they will end up being the same on closing day, no matter which lender you choose.
- Points and/or Credits: Although rates are determined on a fluctuating market, it’s possible to maintain at least some control over how much you can spend on your Rate. You have the option of “buying-down you rate” using “points”. Points are a percentage of the total mortgage amount and depending on the amount you purchase upfront, it can lower your monthly interest rate (so even though you may spend more upfront, it can save you much more money in the long haul). *Or, if you’d rather save more money upfront (at closing), you can take “Lender Credits” which will save you money on closing costs, in exchange for a higher monthly Interest Rate.
- Lender’s Costs: These fees include Lender’s fees, Origination Fees and Application Fees. In order to protect yourself, ask for a Fees Worksheet or a Loan Estimate before going into an agreement.
QUICK NOTE: Origination fees vary between lenders and the type of loan you’ll refinance into.
Once you find out what it will cost to refinance, you can then figure out if it makes sense to move forward.
Don’t forget to think about how long you plan on staying in your current home – it can actually impact whether refinancing will make sense.
How Length of Time In Your Home Impacts Your Benefit
Once you know the length of time you’ll end up staying in the home and the amount it will cost you to refinance your loan, you can then pick out the type of home loan you should refinance into and for how long.
For example, let’s say your goal is to have a lower payment per month, a Rate & Term refinance would be a great option – if you plan on staying in the same home for a while.
Here’s how you would calculate how long you would need to stay in the house to break even:
How To Calculate Your Break-Even Point
- Calculate your monthly savings from your new refinanced payment
- Compute your after-tax rate by subtracting your effective tax rate from 1 (Use 25% as an average: 1 – 0.25 = 0.75)
- Determine your after-tax savings by multiplying your monthly savings by your after-tax rate (Number from #2)
- Get the number of months to break even by dividing your closing costs by your after-tax savings
If you plan on moving before that time, it might not be worth it to refinance.
Another Option: Zero Upfront Costs (No Closing Costs Refinance)
If you’re thinking, “Wait a minute – How is this an option?” – We’ll explain.
Every refinances will have upfront costs and fees. However, for qualified homeowners, you can package the cost into the new refinanced loan amount to eliminate any upfront out of pocket expenses.
The lender could package the upfront costs in two ways:
- Charge a higher interest rate
- Add costs/fee into the total principal balance
Either way, you won’t have to pay upfront out of pocket expenses.
If you’re still unsure about whether it’s worth it to refinance, whatever your goal may be, speak to one of our Home Loan Advisors to get a better idea of your best available options. They will be able to answer all your questions and help you get started.