How Much Should Refinancing Cost?

If you are determining whether a particular refinance package is good for you, the number one thing you should understand are the costs you are paying outside of the actual loan amount and interest you will be paying. Georgina came up to me and said, "I just found the best deal for refinancing. My interest rate is so much lower than my original mortgage and I have no upfront costs."

So I asked her, "Okay, but how much are your payments and how long will you be making them?" Her as well as many others don't realize that the interest rate is not the end-all, be-all of mortgage refinancing payments.

Your monthly mortgage payments and upfront costs consist of fees that amount to approximately 5% of your loan principal. This includes prepayment fees, application fees, appraisal fees, loan origination fees and points, and various others. Sometimes a mortgage lender will try to mask the upfront fees by pushing them into your monthly payments. Meanwhile, they will emphasize their free application fee (or whatever fee it is) without explaining that the fee is being paid for by you, just not upfront.

Costs of refinancing do vary, and a mortgage borrower should shop around to find the best deal. After you have done all the proper research and compared all your different options, I recommend going to your current mortgage lender to explain that you want to refinance and tell them the deal you have found. Many times they will try to beat that deal in order to keep your business.

Here are some standard costs you should expect to pay:

Points: These are typically paid in advance and stand for a given percentage of the principal amount. This fee can be used to lower your interest rate making it so you don't pay as much long term. On average the amount for a mortgage is between 1 and 3 points.

Application Fee: this is what is charged in order to process a loan request.

Prepayment penalty: This is the amount charged to pay off a mortgage early. Generally, one has to pay this when refinancing unless their loan terms say otherwise. When refinancing make sure to ask about the prepayment penalty on your current loan as well as the one you will be refinancing too.

Appraisal Fee: This is paid when you have your home appraised to find out what it is worth. I recommend shopping around and finding out whether refinancing is right for you prior to getting your home appraised.

Other costs you should ask about are survey costs, hazard insurance, attorney fees, and any others that might be unique to the lending institution.

If you are looking for more understanding of why refinancing rates become higher during a refinance boom, see the Mortgage Professor's article, "Refinancing Costs".