Home Refinance Costs - How to Run the Numbers
Summary: This article explains the various costs associated with a home refinance loan. If you are thinking about refinancing your home mortgage loan, it's critical that you understand the average costs associated with refinancing, because this will help you determine whether or not to refinance your home loan in the first place.
Understanding Home Refinancing Costs
Refinancing a home loan involves paying off the original mortgage and taking on a new one. So you are basically "trading" your original home loan for a new loan. Homeowners often pursue this in order to obtain a lower interest rate or more favorable terms.
But refinancing your home mortgage is not always a good idea. Sometimes, a refinance will cost you more money than it saves you. In such cases, the refinancing costs will exceed the amount you save (through lower interest rates), thus making the refinance a bad financial move.
The next logical question would be: "How do I know a home refinance loan is right for me?" And the key to answering this question is to understand the total cost of refinancing the home loan. Once you've learned how to determine the cost of a refi — and you're able to compare those costs to the savings you make over the life of the new home loan — you'll know whether or not to refinance the home mortgage loan.
What Does the Average Refinance Cost Consist of?
Think back to the day you closed on your home and took ownership of it. An exciting time, yes? Do you also remember paying the closing costs associated with the new home loan? I'm willing to bet that you do! Well, many of those same costs will apply to your home refinance as well. The full cost of refinancing a home will vary from one refi to the next, depending on the borrower's qualifications, the type of new loan, and other factors. With that being said, here are some of the home refinancing costs you are likely to encounter:
- Mortgage Application Fee - Regardless of the exact nature of your home refinancing loan, you will almost always encounter an application fee. Mortgage lenders will usually charge this fee to cover the upfront cost of reviewing your loan request, checking your credit, etc. Mortgage application fees usually range from $100 to $350, so be sure to ask about them in advance.
- Origination Fees - Most home refinancing situations will require the borrower to pay a loan processing fee as well. This is commonly referred to as the origination fee and is expressed as a percentage point of the overall loan amount. Let's say your new mortgage loan is for $100,000 and the lender charges you a one-point origination fee. That fee would equal one percent of the loan amount, which in this case would be $1,000.
- Attorney Fees - In most cases, mortgage lenders will have an attorney review all of the refinance documents during the settlement / closing process. Different lenders handle these attorney fees in different ways. Some will cover the costs themselves (usually for competitive reasons), while other lenders will pass the cost on to the borrower. This fee may range from $100 to $300 or more.
- Title Search and Insurance - Before offering you a home mortgage refinance, your chosen lender will examine public records to ensure that you own the property (just like when you took on the original mortgage). The cost of this home refinance item will usually average between $400 and $700. As with all other costs, be sure to get the exact amount in advance.
- Prepayment Penalty - Some lenders charge a penalty fee if you pay off your home mortgage loan early. This is referred to as a prepayment penalty, or an early pay-off fee. This fee would have been part of your original mortgage loan terms. Prepayment penalties can sometimes be steep, which causes some homeowners to avoid refinancing their home altogether. Refer to your original mortgage documents to find out if you would face a prepayment penalty, and how much that penalty would be.
- Appraisal Fee - Like most home refinancing costs, this is another fee you encountered when you took on the original mortgage loan. Lenders will appraise (or re-appraise) a property for a very practical reason. They want to ensure the home is worth the amount you paid for it. If you're getting your home refinance loan through the same lender that gave you your original loan, you might be able to skip the appraisal. Home appraisal fees range from $150 to $450.
- Other Refinancing Costs - This list of home refinance costs is by no means all-inclusive, but it does cover most of the common costs associated with home mortgage refinancing loans. The important thing is to get all of the costs in advance, before you even apply for a mortgage refi.
Finding the Break-Even Point
Now that you have a better understanding of the average cost to refinance a home loan, you can calculate your "break-even" point. This is a crucial step you must undergo before deciding on a refnance loan, because it will determine whether or not the home refinance makes sense to begin with.
The break-even point (or BEP) comes from comparing the cost of refinancing your home to the amount of money you will save in the long term, after the home loan has been refinanced. You should only refinance your home mortgage if the money you save exceeds the money you pay in costs and fees.