You may have heard that the cost of refinancing a mortgage probably isn’t worth it unless you can lower your interest rate by at least 1%. While this is a good guideline to follow, it’s not a hard and fast rule. There are several other factors to consider when deciding whether to refinance your mortgage.
Your main concern should be that the savings you get from mortgage refinancing are greater than the costs.
Understand what mortgage refinance rates are available
Speaking with a mortgage loan officer is the best way to find out what your new interest rate will be. Based on your credit score, they can give you a good idea of your potential mortgage refinance rate.
The lender may also offer the option of ‘paying a point upfront.’ If you’re able to pay 1% of the loan out of pocket at closing, your mortgage refinance rate may be lower. After speaking with a loan agent to figure out your new interest rate, you’ll be able to calculate your monthly savings and determine whether the cost of mortgage refinancing is worth it.
Mortgage refinance savings formula
Lendingtree.com offers this simple formula that can help you determine how long it will take to realize your savings after refinancing a mortgage loan.
First, subtract your new monthly payment from your old monthly payment to calculate your monthly savings. Then divide the refinance closing costs of your new loan by the monthly savings. Be sure to include points, as well as the cost of an appraisal, credit report and home inspection in your refinance closing costs. The figure you end up with will be the number of months it will take to break even.
If you plan to stay in your home longer than it would take to break even, loan refinancing may be a good idea. But how do you know what your new payment will be? And what will the refinancing costs be?
Estimate your mortgage refinancing fees
Get an idea of what your mortgage refinancing fees might be, as reported by SFGATE.
Mortgage application fee
The mortgage application fee generally covers the cost of a credit report and an appraisal, but may include other administrative costs. This fee can be anywhere from $250 to $500.
An origination fee, or loan processing fee, is typically a percentage of your total loan. The origination fee is usually about one percentage point of your refinanced mortgage loan total. For an $180,000 home, the origination fee would be $1,800.
Document preparation fee
Most lenders charge a fee to review the mortgage refinancing documents before the loan is closed. Not all lenders charge this fee, but if you are required to pay a document preparation fee, you can expect it to be between $200 and $400.
You may want to decrease the amount you pay in interest by paying off your loan early, but depending on your lender, that plan could backfire. Some mortgage lenders charge a fee for early repayment – often as much as five months’ worth of mortgage payments – so be sure to find out whether your lender charges this fee before closing the deal.
The value of your home is an important factor in determining your mortgage rate and whether you can get a home equity loan or line of credit after refinancing (should you wish to do so). A professional appraiser will usually charge between $300 and $700 to determine the value of your home.
To ensure that you’re the proper owner of your house, the lender may wish to examine public records. The title search fee usually ranges between $150 and $450, although it may be waived if you’re refinancing with your original lender.
Additional refinancing costs
Other refinance costs, including flood certifications, pest inspections, courier services, title and recording fees and various tax fees should also be included in your refinancing cost calculations. Although most of these additional refinancing fees are relatively inexpensive, you should consider them when deciding whether mortgage refinancing is worth the cost.
Decide if refinancing is worth the cost
Refinancing a mortgage loan can be a long and expensive process. Make sure you have accurate figures when calculating your costs and savings, and use a mortgage refinance calculator from Nationwide Bank® to help determine whether refinancing is right for you.