When you refinance your mortgage, you and your family can save a lot of money. You could save money each month and over the life of the loan by replacing your current mortgage with a loan with a lower interest rate, changing the term of your loan, or even consolidating all your debts into this new loan.
The general rule is that you should think about refinancing your mortgage when the interest rates are 1.5 to 2% lower than what you are paying now.
Would it be worth it to get a new loan?
Refinancing can be a good idea, but not everyone has the money to do it. There are many things to think about, like how long you plan to live there. Most sources say that it takes at least three years for the savings from a lower interest rate to pay for itself, since refinancing costs money.
Homeowners who:
- Want to use the equity they've built up in their home to get cash for a big purchase or for their kids' college.
- You have an adjustable-rate mortgage (ARM) and want a fixed-rate loan so you can be sure you'll always know how much your mortgage payment will be.
- Want to build up equity faster by switching to a shorter-term loan.
How Much Does It Cost to Refinance?
Costs can vary a lot from place to place and lender to lender, so the numbers below are only estimates. Your actual closing costs could be more or less than what is listed below.
Fee ranges from $75 to $300. Your lender will charge you this fee to cover the costs of processing your loan request and checking your credit report.
Appraisal Fee $150 - $400. This fee pays for an appraisal, which is a good guess of how much the property is worth.
Costs range from $125 to $300.
Homeowner's insurance for risks $300 - $600.
Review fees for the lender's lawyer range from $75 to $200. Most of the time, the lender will charge you for the fees paid to the attorney or company that handles the closing for the lender.
Look up the title and get title insurance $450 - $600. This fee will pay for checking the public record to make sure the property is owned by the right person and for an insurance policy.
Fees range from $175 to $350.
Fees for starting a loan 1% of the loan amount. The lender will charge you an origination fee for the work they do to evaluate and set up your mortgage loan.
Mortgage Insurance 0.5 percent - 1.0 percent . Depending on the type of loan you have and other things, the fee for private mortgage insurance could be another big cost.
Points 1 percent - 3 percent . Points are pre-paid finance charges that the lender adds at closing to make more money than the interest rate on the mortgage note allows. One point is equal to 1% of the amount of the loan.
Fee for paying early. Your current mortgage could be the biggest reason why you don't want to refinance. If there is such a fee, it will be written in the mortgage papers for your current loan. When you pay off a loan early, you may have to pay interest for the whole month. In the future, make sure there is never a fee for paying off a loan early.
So, to sum up
A homeowner should expect to pay between 3 and 6 percent of the remaining principal in refinancing costs, plus any penalties for paying off the loan early and the cost of paying off any second mortgages.
Whether or not that is a smart choice comes down to numbers.
