If you're refinancing your mortgage for the first time, you may not have any idea how much a new lending agreement will cost. It's critical to have a ballpark figure for refinancing costs in order to determine how much money you'll save in the long run with lower mortgage payments.
Many homeowners pay 3 to 6 percent of the outstanding principal in refinancing costs, according to the Federal Reserve Board. For example, on a loan of $100,000, the refinancing cost might be around $3,000 or $4,000. This is a significant amount of money, so it helps to understand how it stacks up against your eventual savings with a refinanced mortgage.
To determine how costs compare to savings, and how soon you'll see financial benefits from refinancing, the Federal Reserve Board suggests calculating the break-even point. You’ll have a better idea whether refinancing is a good move if you compare the break-even point with the amount of time you plan to own the home.
Individual Refinancing Costs
Below are some of the standard costs that are part of an overall refinancing package:
Commonly Required Costs
- Loan origination fee - This standard fee is a percentage of the loan principal and often falls under 2 percent.
- Inspection Fees - Lenders often require inspections for termites and other basic property inspections, which will cost you several hundred dollars.
- Attorney Costs - Attorneys typically review the documents, which may push costs up into the triple digits. Lots of borrowers see lawyer fees of more than $500 or even near $900 show up on refinancing agreements.
- Homeowners Insurance - This is another mandatory part of refinancing costs. The cost of your homeowner’s insurance policy depends on many factors about the property, including square footage, lot size, fire risk and more.
- FHA and Private Mortgage Insurance Fees - For borrowers who did not put down a 20 percent down payment on a property, costs for mortgage insurance may apply. These are also a percentage of the loan principal, typically around .5 to 1.5 percent.
- Title Review and Title Insurance - Unfortunately, these are also legitimate fees in a refinancing agreement. Every time the loan is turned over, experts must review the title to make sure there are no outstanding issues. According to the Federal Reserve Board resource, this cost ranges from $700-$900 typically.
- Points - Points are an elective cost. You can purchase them to lower your interest rate. Points are usually 1% of the loan amount. So if you have a $100,000 mortgage, one point would equal $1,000. Look at your situation and the loan agreement carefully to see whether you benefit from buying points or not.
- Appraisal Fee - Many refinancing agreements also require a property appraisal. Appraisals can cost several hundred dollars and are usually between $400-$500. If you have had a recent appraisal, you may be able to skip this fee.
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