Refinancing your home loan can lower your payment at the expense of cash out of your pocket. Every mortgage loan has fees that have to be paid at closing, even those “no-fee” refinance offers come at a price. Here are several tips to minimize the risk that comes from refinancing your home so you’ll keep more of your hard-earned cash.
Mortgage Closing Costs
Your exact closing costs can be found on the HUD-1 Settlement Statement in your mortgage disclosure package. Typical refinancing closing costs include paying fees for the application, loan origination, discount points, appraisal, title search and insurance and any prepayment penalty from your current lender. Common mortgage junk fees include rate lock, third party processing and broker courier fees.
Think that you can get around paying closing costs with one of those no-fee refinance offers? Remember there are no free lunches when it comes to your finances. There’s always a catch when the lender offers to pay for something…it usually means you’re getting higher refinance rates.
Some Mortgage Fees Are Negotiable
The most commonly overpaid mortgage refinance fees are the loan origination fee and discount points. Origination fees are paid to the person or company arranging your refi. This could be you broker, mortgage company, lender or bank. One percent is a pretty standard amount to pay for the broker’s fee; however, I’ve reviewed community based credit unions that charge as little as $400 for the loan origination fee.
What about discount points? Some homeowners focus on getting the lowest possible refinance rates at the expense of fees, including discount points. This is a fee you pay to essentially buy down your mortgage rate. One discount point is one percent of your loan amount and typically lowers your interest rate by .25% per point. Is it worth it? Discount points are a relic of the 1980s when double-digit mortgage rates were what you paid. You could buy your rate down by half a point and quickly recoup your cash from the lower payment.
Fast forward to today’s refinance rates which have bottomed out below 3 percent. The benefit you’re getting by paying points is marginal with interest rates so low. Recouping this out of pocket expense along with your other closing costs can be difficult, even impossible for most homeowners. The problem is that most lenders quote refinance rates that include discount points, making apples-to-apples comparisons of even today’s best mortgage lenders nearly impossible.
Breaking Even On Your Out-of-Pocket Expenses
You can approximate how long it’s going to take to break even from mortgage refinancing by dividing your total closing costs by the amount you’re saving each month. If your mortgage payment goes down by fifty bucks but you have to pay $1,600 to close it’s going to take you almost 3 years to benefit from refinancing. Most homeowners refinance every 4-5 years for one reason or another. If you’re unable to break even on your closing costs you’re going to be losing money no matter how much you’re buying down your refinance rates.
Refinancing Your Home is a Risk
Like just about everything else with your finances, refinancing your home comes with risk. You can minimize your risks by choosing the right type of mortgage (Fixed vs. Adjustable Rate) and term-length. The term-length of your home loan is the amount of time you have to repay the mortgage and along with the interest rate determines your payment amount.
There are advantages to both 15-year and 30-year home loans depending on your financial goals and budget. If your budget can support the payment that comes with a 15-year mortgage you can save yourself a boat-load of cash in finance charges by going shorter.
Remember the less you pay at closing for things like mortgage loan origination the sooner you’ll benefit from the new home loan. Careful refinance rate shopping comparing both interest rates and fees can save you thousands of dollars out of pocket and ensure you’re getting a better deal than your neighbors when refinancing.
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