If you can pay back the costs of refinancing your mortgage, it is a smart financial move. You can expect to pay between 2% and 6% of the loan amount in fees and points for an average refinancing deal. If you can lower your interest rate by two points, you will usually be better off in the long run.
Costs for a typical mortgage
Refinancing your home is the same as getting your first mortgage. All the fees you paid when you first got your mortgage will have to be paid again. Most of the time, these had fees of up to $2,000 and at least one point. Fees will be charged for the application, appraisal, survey, review by an attorney, and search for the title.
In addition to the 1 percent origination fee, you may also have to pay a couple of points to get lower rates. But points can be changed. You can choose to pay nothing and get a higher rate, or you can pay a couple of points and get a lower rate. Make your choice based on how much points would cost you. Using an online mortgage calculator can help you figure out how much each choice will cost and how much money you will save.
Costs for refinancing
You may also have to pay a prepayment penalty or private mortgage insurance on top of the regular mortgage fees. Loans that are backed by the government, like FHA or VA mortgages, can't have prepayment fees. Some states also limit prepayment fees. Before you decide to refinance, check your current mortgage.
If you take out your equity, you may also have to pay for private mortgage insurance (PMI). This can cost you hundreds of dollars a year. But you don't have to worry about this with a loan backed by the government.
How to Choose?
Look at your loan and home goals when trying to decide whether or not to refinance. If you plan to live there for a few years, you have time to get your money back.
You can also ask mortgage lenders for quotes to find out what kind of deal you can get. You can look at the rates and points that are being offered without making a commitment.
