Refinancing a mortgage can help you adjust the terms of your loan, save money on your monthly payments or tap much-needed cash. There are many ways you can refinance a loan, giving you several diverse options for adjusting your finances to meet your needs. It s important to keep in mind, however, that refinancing isn t free and the associated expenses may total more than your savings.
Understanding the Cost of the Loan
Refinancing a mortgage isn t as simple as filling out paperwork and swapping one loan for another. Mortgages come with a slew of additional fees that you ll need to pay along the way. Below are just some of the costs involved in refinancing a mortgage:
- Mortgage application fee: $250 to $500
- Origination fees: Typically one percent of the total loan
- Document preparation fee: $200 to $400
- Prepayment penalty: As much as five months worth of mortgage payments
- Appraisal fee: $300 to $700
- Title examination: $150 to $450
- Credit fees: $25 to $65
Your lender may waive or cover some of these refinance costs, or they may add additional expenses like flood certifications, courier services and additional tax fees. When you refinance, it s crucial that you perform a diligent cost comparison to find the best offer.
Determining Your Break-Even Point
Refinancing your mortgage can help you lower your monthly payments, but this doesn t always lower the total amount that you re paying for your home. If you refinance a mortgage that s already 10 years into repayment with a new one that sets you back 30 years from repayment, you ll often pay a higher total by the time the loan is repaid. Multiply your monthly payments by the total life of the loan to see how much you re paying now compared to what you ll pay with your refinanced loan.
If you lower your interest rates by one percent or less, the amount that you save is often minimal. Compare these savings to the costs of the loan to determine whether you re really coming out ahead.
Reasons to Refinance Your Mortgage
One of the best reasons to refinance is to replace an adjustable rate mortgage with a fixed rate mortgage. It s impossible to predict your actual cost savings, as you don t know how much your adjustable rate will increase over the life of the loan. However, a fixed rate mortgage eliminates this source of unpredictability in your life and typically saves you money.
You may also choose to refinance, even while taking a loss to lower your monthly payments if you re struggling financially. If you need access to a large sum of money to pay off other debts, purchase a vehicle or handle medical expenses, you can opt for cash-out refinancing that gives you cash upfront while adding the sum to your loan.
There are many pros and cons to mortgage refinancing, but it s worth considering if you re unhappy with your current mortgage or need to make a major adjustment to your current financial situation. Consider your choices carefully to make sure you find the right lender and best terms for your new loan.