If you’re in the process of mortgage refinancing you might be wondering what are reasonable closing costs of refinancing your home loan. Low closing cost refinancing can be difficult to find because most homeowners fall for common mortgage mistakes like no fee refinance offers that drive up costs making it difficult, if not impossible, to recoup out-of-pocket expenses. Here are several tips before you refi to help you find the best deals to refinance mortgage loans without overpaying one red cent, unlike most of your neighbors.
Finding a Mortgage Refi Company
How to shop for refinancing is a common question I get from readers of my blog. Should you go with a nationwide giant like Amerisave or concentrate on finding a local, small-time mortgage broker to arrange your loan with the best mortgage lenders? It’s true that refinance rates are at historically low levels so if you have a decent credit score it’s not difficult to get good mortgage rates; however, most homeowners focus solely on getting the lowest refinance rates at the cost of closing costs and overpay thousands of dollars.
If you could refinance for a fixed fee it would make everything easier; however, mortgage lenders are out to make the process as confusing as possible to boost their profits at your expense. So what are reasonable closing costs of refinancing? The first thing you need to know is that all closing costs, lender and broker fees are negotiable and vary widely across lenders. Most people haggle over mortgage rates but not fees. Considering that closing costs are an out-of-pocket cost you’ll have to fork over it’s in your best interest to haggle. Remember your mortgage broker and lender aren’t your friends…Question Everything. Don’t be afraid to be an ass…It’s your money.
Should I Refinance My Mortgage?
Closing costs make or break your refi…plain and simple The reason these fees are so important when refinancing is that you’ll have to recoup your fees before benefiting from the new home loan. The more you pay, the longer it’s going to take to break even recouping your refinancing closing costs. Here’s an example to illustrate how you can calculate how long it’s going to take to break even and possibly save $100 a month on your mortgage loan.
Suppose for conversation sake that you’re refinancing your home for $315,000 at 5.5 percent. Your out-of-pocket expenses will be $5,500 (at closing) to secure the new home loan. Using a simple mortgage payment calculator your new mortgage payment will be $1,788. In this example your existing mortgage rate is 6.25% and you’re currently paying $1,939 per month which means mortgage refinancing will net you a monthly savings of $151 per month. Considering mortgage refinancing will cost you $5,500 to save $151 a month is it going to be worthwhile?
Simply divide the amount you’re paying to close by the amount you’re saving each month and you’ve got the amount of time it’s going to take to break even. In this case you’re paying out $5,500 to save $151 ($5,550 / $151 = 37 months). It’s going to take you 37 months, just over three years to break even recouping your closing costs. Is this a good deal? According to the Mortgage Bankers Association the average homeowner refinances every four years so this would give you a full year to benefit from your new home loan.
The Hidden Cost of Mortgage Refinancing
There is a hidden cost of refinancing that people rarely talk about. I’m referring to your home loan’s amortization schedule. Loan amortization is defined as the process of paying down your home loan over time. The problem with refinancing is that home loans are front-loaded with interest meaning that in the early years the majority of your payment goes into the lender’s pocket as interest and very little is applied to the principle loan balance. As time passes this shifts and more of your payment is applied to the principle; however, refinancing resets the clock and you’re right back to stuffing cash in your lender’s pockets. There is one way to overcome this by continuing to make your old payment amount after refinancing. Most homeowners are looking to lower their monthly payment so this strategy may not work for you.
Getting back to our original question: “What are reasonable closing costs of refinancing?” the single best answer I have for you is as little as possible. The less you pay at closing the faster you’re going to break even recouping your out-of-pocket expenses. Question everything on your Good Faith Estimate and HUD-1 Settlement Statement keeping a sharp eye out for anything resembling a rate lock fee, application fee, processing fee, and mortgage broker courier fee as these are pure junk fees.
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