The Cost of Refinancing a Home – Is It Worth It?

There’s an old adage that says you shouldn’t refinance a home unless you can lower your interest rate by at least one percentage point. While this is undoubtedly sound advice and a good starting point, there are a number of important factors that one must consider before trading in that old mortgage loan for a new one.Above all else, you should make sure that your savings outweigh the cost of refinancing.In general, there is a simple equation that you can use to calculate just how long it will take to realize your savings. LendingTree.com offers this helpful formula: Subtract your new monthly payment from your old monthly payment to calculate your monthly savings. Divide the closing costs and other fees of your new loan by the monthly savings to calculate your break-even point. This amount will be the number of months it will take to break even and start saving money. So if you’re planning to stay in your home at least as long as it takes you to start realizing your savings, refinancing may be worth it. But what if you don’t know how much your new monthly payment will be? And how do you find out how much the typical refinancing costs and other fees are? The following are some general cost guidelines that can help you make a smart refinancing decision for your unique situation.1. Understand what interest rates are available. First, you should get a good idea of what your new interest rate would likely be by speaking with a mortgage loan officer. They will probably pull your credit score and then give you a good idea of the interest rate range you will receive. At this time, your lender will also typically discuss the option of paying points up front in order for you to secure an even lower interest rate. For example, one discount point would equal an upfront payment of an extra one percent of the loan payment at closing. After paying this “point” amount, you will typically receive a reduction of your interest rate, which will save you money in the long run. Once you do that and get a better idea of your annual percentage rate, or APR, you will be able to figure out approximately what your new monthly payment would be in comparison to your current one. This way you’ll be able to calculate your monthly savings that was referred to in step number one of the LendingTree.com formula.2. Estimate your refinancing fees. It is helpful to understand the estimated amount of fees like closing costs, appraisals, etc. The following are the average fees and amounts as determined by Bankrate.com researchers (based on a $180,000 mortgage loan): Mortgage application fee -Typically, lenders charge a mortgage application fee to cover everything from reviewing your loan request to checking your credit score. This refinancing fee is typically anywhere from $100 to $350. Origination fees -An origination fee, or a loan processing fee, is usually expressed as a percentage point. A typical origination fee would be around one percentage point of your new mortgage loan total. For example, origination fees would be approximately $1,800 if your new mortgage loan was for $180,000. Attorney fees -Most lenders will have an attorney look over all the documents before closing. However, not all lenders charge the borrower this fee. If you do have to pay attorney fees, expect to pay anywhere from $100 to $300. Prepayment penalty – Some lenders charge a prepayment penalty fee if you pay off your existing mortgage loan early. While this isn’t the case with all loans, it is important that you understand if this penalty is a part of your initial loan terms before you apply to refinance. Typically, it can cost up to five months worth of loan payments if you incur the penalty. Appraisal fee -When looking to refinance, most lenders will require you to have your home appraised, or reappraised to make sure your house is still worth what you paid for it. Also, if you are looking to receive cash out after refinancing, an appraisal is necessary to see how much your home’s value has increased. Home appraisal fees can range anywhere from $150 to $450. Title search – Often, your chosen lender will examine public records to make sure that you in fact do own the property that you are refinancing. This refinancing fee typically costs between $400 and $700. However, this examination may not be necessary if you’re refinancing with your original lender. Additional refinancing costs – Other costs such as flood certifications, pest inspections, courier services, title and recording fees and various tax fees will also have to be added to the total cost consideration. While most of these additional refinancing costs and fees are relatively inexpensive, it is important to take all factors into consideration when deciding whether or not to refinance. 3. Decide if refinancing is worth your while. Thirdly, decide if refinancing will in fact save you money when looking at your lowered monthly payment in comparison to all the closing costs and fees that you will most likely have to pay. Because if it’s not, it probably makes sense to stick with the loan you already have.