Beware of the Common Refinancing Fees!
For those who aren’t familiar with the entire concept, to refinance a home mortgage means to settle that original mortgage and take the outstanding balance and roll that into an entirely new mortgage.
Typically this is done because the homeowner can qualify for a lower interest rate which would save him or her literally thousands of dollars over the life of the loan. However this means that the lender is losing those interest payments.
So why would they allow anyone to do this? It has to do with refinancing fees that are common with this arrangement. Those fees are meant to offset the money that a lender will be losing and in some cases they make this process not worthwhile for a homeowner.
How can you know if refinancing fees in your case will be manageable and that your savings will be worth those fees? How do you even know what those refinancing fees will be?
Typically your current mortgage will spell out your prepayment refinancing fees. Usually these are described as points; a point is usually 1% of your loan balance. That translates to $1,000 for every $100,000 of your mortgage.
So 2 points of a $100,000 loan equals $2,000 and so on. Your mortgage will usually say how many points you have to pay in refinancing fees, and you can do your own math. Take your current mortgage balance and multiply it by .01 for 1 point, .02 for two points, and so on.
So if your current mortgage is $250,000 and your prepayment refinancing fees are 3 points, you would multiply that $250,000 by .03 and come up with $7,500. This means that you would need to pay $7,500 just in prepayment penalties alone.
These points aren’t typically the only refinancing fees you’ll need to pay. Just like with your original mortgage, you need to pay closing costs and fees when you go through the refinance process. These costs include things like an appraisal on your home, an inspection of the home, a title search to see if there are any liens on the property, a credit check for you, and so on.
Just like closing costs on your original mortgage, you’ll be responsible for these refinancing fees which typically run over $1,000. Some have the option of rolling these costs into the mortgage itself but of course this will raise the amount you’re still responsible for.
The only way to know for sure all your refinancing fees is to review your current mortgage and speak to your lender. Usually you can do this over the phone; simply tell him or her that you’re looking to refinance and want to know your specific refinancing fees.
They can review your mortgage itself and explain these fees in greater detail and give you specifics. After that you need to decide if the savings you would get from refinancing would offset those fees enough to make refinancing a worthwhile decision for you and your financial portfolio overall.
