Be smart when you refinance your home
It may sound tempting to refinance your home loan now that rates are low, but is it really the smart thing to do? Before you make the final decision to refinance your home be sure to do all the calculations carefully. You could actually end up losing money on a home refinance.
When you refinance your home there are many fees involved that must be considered along with the lower rate. There are many fees that are mandatory before you can close the refinance loan and these little fees can add up to a large chunk of money at the end. Typical refinance fees include: application fee, title search and title insurance, appraisal fee, survey costs, hazard insurance, attorney’s fees, home inspection fees, loan origination fees, mortgage insurance, prepayment fees, flood certification, interim interest, and discount points.
An application fee is charged by the lender which covers their cost to process the loan. Usually this fee is paid up front and ranges from $75 to $300. Most lenders apply this cost to the final loan. Usually this fee is non refundable even if you are not approved for the loan.
A title search is required even though one has already been performed on the home. A title search is a review of the historical record associated with the property. This includes items such as property and name indexes, deeds, court records, etc. The lender does a title search to ensure that the buyer is purchasing a house from a legal owner and there are no liens against the home. In the case of a refinance loan they want to make sure you own the home and they are aware of any outstanding liens or loans on the home.
The lender needs to perform an appraisal fee to make sure the value of the home will stand good for the loan amount. Today many lenders will only loan an amount equal to 80% and 90% of the home value. About a year ago many lenders would loan over 100% of the home value, but times have changed. For example if your home is appraised for $200,000 then a lender who lends 90% of the value would only loan $180,000 toward the home. This means if you owe more than $180,000 then you could not refinance the home. Typical appraisal fees range from $150 to $400 and vary based on the value of the home.
Sometimes lenders require a survey on the property before you can refinance a loan. This is to make sure you have not crossed any boundaries of the property while you have lived there. This cost can range from $200 to $400 depending on the size of the property.
Hazard insurance costs are included in closing costs. It’s mandatory to have hazard insurance on the property before a loan can be acquired. Most lenders requrie these to be prepaid thus they are included in closing costs.
Attorney’s fees must be paid at closing to cover any work the attorney does for the loan. Usually these fees range from $50 – $200.
Sometimes lenders a new home inspection before you can refinance the loan. This is to make sure the home is still in good shape in case you were to default on the loan. Home inspection fees usually range from $150 to $400.
A loan origination fee is a fee charged by the lender for preparing, evaluating and submitting a proposed mortgage loan. Most of the time these fees are expressed as a percentage of the loan amount. A typical loan origination fee is about 1% of the loan amount.
Mortgage insurance or PMI is usually required by lenders if you need a loan for more than 80% of the homes value. This can be charged on a monthly basis or as a lump sum at closing. If it’s paid in closing it’s typically 1/2% to 1% of the loan amount.
A tricky fee that is often overlooked is a prepayment fee. If you pay off the loan before the end of the term you will be charged a fee. This fee can vary by states but should always be presented to you at closing.
A flood certification fee is a small fee, usually less than $50. It’s required by most insurance companies to ensure the home is not in a flood plain.
Interim interest is the amount of interest that has accrued from closing date until the end of the month. This can be a large sum if you close at the first of the month.
Finally, discount points is a percentage amount that is typically 1/2% to 1% of the loan amount. This fee is used to reduce the interest rate of the loan. This varies by bank but an example would be paying 1 point (1% of the loan amount) to reduce the interest rate 1/4%.
As you can see there many fees associated with closing a loan. Be sure that these fees don’t add up to more than you will save over the time you expect to keep the loan. Just because you are getting a smaller monthly payment doesn’t mean you are actually saving money!