What Are the Costs of Refinancing?
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What Are the Costs of Refinancing?
Like many good things, refinancing a mortgage carries a price tag. Actually, there are several distinct costs associated with refinancing.
Things To Know
- The loan origination fee is often the largest expense of refinancing.
- There are plenty of other costs to plan for, such as appraisal fees, survey fees, title insurance, and recording fees.
- No-cost refinancing typically results in a higher interest rate.
The loan origination fee
The loan origination fee is often the largest expense. This fee is expressed in points and is considered upfront interest on the loan. A point equals 1 percent of the principal of the loan. For example, 3 points on a $100,000 mortgage would equal $3,000. Points are part of the lender’s profit and are generally considered in tandem with the interest rate. The two are usually related: the higher the rate, the lower the points, and the lower the rate, the higher the points.
When the points cover more than the origination fee, the additional points are called discount points, which serve to offset the interest rate. Sometimes, you can pay discount points upfront at closing to get a lower interest rate on your mortgage. As a result, it may take you three or four years—or more—before your interest savings cover all of the loan costs. This may still be a good option if you are planning to keep your home for a number of years.
Other costs
Other costs may include appraisal fees, survey fees, title insurance, termite inspection, and fees to record the loan with appropriate government offices. You also may incur legal costs, since you may want (or your state may require) your attorney to attend the closing. Basically, refinancing costs usually include the same costs involved in getting your mortgage in the first place. Sometimes, the points and other closing costs can be refinanced as part of the loan package.
About no-cost refinancing
Lenders sometimes offer no-cost refinancing, charging you zero points for your mortgage loan. Generally, you will pay a higher interest rate on a zero-point mortgage than on an otherwise comparable mortgage with points, and you will still have to pay the other costs associated with the loan.
Prepayment penalties
Another cost that sometimes affects refinancing is a prepayment penalty, which lenders occasionally charge. Consult your mortgage agreement to see whether it contains a prepayment penalty, and try to avoid prepayment penalties in any refinanced mortgages. Even if your old mortgage requires a prepayment penalty, refinancing may still make sense, depending on your potential interest savings.