It can seem like a slam dunk refinancing your mortgage. With interest rates still hovering near all-time lows, dropping a point on an existing mortgage has a certain luster to it. You can refinance to:
- Lower your monthly payment
- Take cash (equity) out of your home
- Lower your interest rate
- Adjust your loan term
- Convert a variable rate to a fixed rate
Recent rates were as low as 3.708% APR on a 30-year, fixed-rate mortgage. (View current mortgage refinancing rates at LendingTree.)
But do your homework: Consumers should know that lender fees, title insurance premiums, appraisals and escrow charges attached to a refinancing loan can add closing costs that imperil the financial benefits of a new mortgage.
While there are so-called "no-cost refinance" products, lenders are sure to recover a profit in closing costs or fees through adjustments upwards on the interest rate or term. Consumers must evaluate where they stand financially with their current mortgage and whether lower payments justify the costs. It's not unheard of to pay up to 6 percent of the outstanding principal in refinancing fees. The real variable to explore is how much is saved in total interest, with the pre-existing and new mortgage payments combined. Borrowers can use LendingTree's Refinance Calculator to determine the break-even point – the number of payments until monthly savings have covered the cost of the new mortgage.
Fees and charges should be detailed in the lender's Good Faith Estimate and are required in the Closing Disclosure three days before finalizing the loan. Typical charges can add at least $4,000 to the total cost of the loan. Beware these five hidden costs in refinancing your mortgage:
1. Application Fee
These initial fees are charged for closing the old and opening the new mortgages. Approximate cost: $300-$500/negotiable. They're charged in conjunction with:
2. Loan Origination Fees
Borrowers can't avoid paying the customary charge of 1-1.5% on the principal to prepare mortgage paperwork, but consumers can shop for the lenders offering the lowest charges. There is a documentation fee of approximately an additional $250-$400.
3. Private Mortgage Insurance (PMI)
On conventional refinancing products, consumers who cannot pay up to 20 percent down are charged with PMI, which can add up to 2 percent at the high end. Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) loan borrowers can avoid these charges.
4. Prepayment Penalty
The worst offender: Walk away from an offer that requires lender compensation for early retirement of the mortgage. Pre-payment penalties can add up to six months' worth of interest payments, wiping out any savings you hope to make by paying down the principal early.
5. Appraisal Fees
An appraisal report can add another $500-$700 to the mortgage cost. The appraisal helps underwriters assess the loan-to-value ratio, raising the down payment requirement or PMI rate for borrowers where the equity has actually decreased. A lender may waive the appraisal if one was done recently on the home.
The other costs associated to refinancing include charges for attorneys, inspections, title searches, title insurance premiums, and recording fees. To see if a refinanced mortgage makes sense, crunch the numbers at LendingTree.