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What Does It Cost to Refinance A Mortgage?

Thursday, Sep 10, 2009

With interest rates remaining near historic lows, homeowners have been rushing to refinance their mortgages and save money. But a low interest rate is only part of the picture - there's also the question of the fees that must be paid. So what should you expect to pay to refinance your mortgage?

With interest rates remaining near historic lows, homeowners have been rushing to refinance their mortgages and save money. But a low interest rate is only part of the picture - there's also the question of the fees that must be paid. So what should you expect to pay to refinance your mortgage?

In thinking about refinancing, many homeowners overlook the fact that they'll simply be getting a new mortgage - with many of the same fees that had to be paid when they first bought their home. These fees can have a big impact on whether you save money or not - so it's important to know what to expect heading into the process.

Because lending practices and rates vary widely in different parts of the country, it's difficult to say exactly what you might pay to refinance your mortgage. A general rule of thumb is that you can expect to pay about 3 to 6 percent of the mortgage principal in fees when you refinance, depending on local taxes and whether you opt to pay discount points to obtain a lower interest rate.

Remember too, to think about fees when shopping around for a refinance. You don't have to refinance with the same lender who has your current mortgage, so you can check with several different lenders to see what kind of rates they offer. At the same time, check into the fees they charge as well - some lenders will offer low interest rates but will try to make up the difference by tacking on "junk" fees or overcharging for legitimate costs.

With that in mind, here are some of the most common fees you can expect to pay when refinancing.

Application fee: This covers the initial cost of processing your mortgage refinance request so the lender knows whether they want to lend to you or not, and at what interest rate. This shouldn't cost more than $75-$300 and should include the cost of obtaining your credit report. You typically have to pay this whether or not your application is accepted.

Loan origination fee: This is the lender's charge for setting up the loan. Because most lenders promptly sell the mortgages they make to other investors, this is where mortgage lenders typically make their money. Expect to pay 1 - 1.5 percent of the loan principal.

Appraisal fee: You might not think you'd need to pay this on a refinance, since you had the home appraised when you first bought it. But home values can change, and the lender will want a current figure. They typical cost should be about $150-$400, but look out for padding - the fee should represent the actual cost charged by the appraiser and not any add-ons by the lender. Check to see what appraisers typically charge in your area to make sure what you're being charged is reasonable.

Inspection: The lender may request an inspection for termites or evaluation of the well, septic system or other major systems to ensure there are no hidden problems that could undercut the appraised value or result in costly repairs. Your state may have its own inspection requirements as well. Figure on $175-$300 if an inspection is required.

Title insurance: This covers the cost of checking for possible liens against the property or problems with a "clouded" deed. Even if you're refinancing with the same lender, they'll still want to check to make sure you haven't added any second mortgages they may not be aware of or have tax issues or other problems that could give a third party a claim against the property. Costs vary widely from state to state, so these can range from $250 up to $900.

Attorney/closing fee: This is the fee paid to the attorney or title company to make sure all the mortgage documentation is order and for conducting the closing. Figure on around $750, plus or minus a couple hundred.

Points: You really don't have to pay these. But you can use them to lower the interest rate on your loan. The usual formula is 1 point = 1 percent of the loan principal, which shaves 1/8 of a percent off your interest rate. You can generally pay up to three points, although your lender may not be willing to do so if you already have a low rate to begin with.

Other fees: Charges for document preparation or delivery, administrative fees, electronic transfers, courier fees and other clerical functions are often referred to as "junk fees" - they really ought to be included in the application or loan origination fees - otherwise, what are you paying for? But some lenders use these to pad their revenues, so be aware. Charges for obtaining your credit report can fall under these as well, particularly if the charge exceeds $25. The best way to identify a junk fee is to ask yourself what it would cost if you to have that service done on your own - if you could do it yourself for less, it's probably a junk fee.

One final thing to keep in mind. Mortgage refinancing fees are what determines what is known as the "break-even point," the time it takes for your accumulated savings on interest to equal what it cost you to refinance the loan in the first place. So make sure your savings in interest are going to be enough to balance out the refinancing fees in a reasonable length of time - particularly if you only expect to be in the home for a few years. It doesn't make sense to refinance to a lower rate if you're not going to be in the home long enough to reap the benefits.

 

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