Refinancing a mortgage is very similar to the original application and closing process. In the best case, refinancing a mortgage can save thousands of dollars in payments or liquidate home equity. The first step is shopping for the most competitive rates. Starting with the company who has the current loan is often the best place to start. If you refinance with the same company penalty fees might be waived and additional costs, including a home inspection, property survey, and title search, might be avoided. Once you have found a mortgage with more favorable terms, it’s time to apply for the loan. The lender will check your credit score and verify the value of the property and amount of the loan. The loan application can cost anywhere from $70 to $300, regardless of approval. After the application is processed, the applicant can request an estimate of the refinancing cost. This disclosure should include the interest rate, penalties, and fees related to the refinancing. Once the lender and homeowner agree to the loan, the closing process begins. Attorney’s fees for the closing process can cost up to $1,000 and are paid directly to the bank or lender. One day before the closing, the homeowner can request a copy of the refinancing papers. The HUD-1 form includes all of the relevant data, however it’s the homeowner’s responsibility to request and review these documents. The entire refinancing process can be completed in two weeks.

Costs

Mortgage refinancing can cost anywhere from 3-6% of the loan principal in various fees. Many loans have a penalty clause that requires homeowners to pay 1-6 months’ interest for backing-out of the loan early. Federal programs and loans through credit unions generally aren’t allowed to charge these penalty payments. The most common fees for refinancing are application fees, home value assessments, property and pest inspections, survey fees, title searches, and pre-payment penalties.

Considerations

Refinancing is a big step, so it’s important to know all the costs. Toward the end of a mortgage, monthly payments include a small percentage of interest and a large amount of principal. By refinancing late in the duration of a mortgage, the process is started over with higher interest payments. Knowing when to refinance is an important part of maximizing money savings. To determine how many months the refinancing will take to pay for itself, the total cost of refinancing should be divided by the monthly savings minus taxes. Consumers should aware of unscrupulous advertising for low interest rates and no-cost refinancing. No-cost financing is a sneaky way for lenders to act like they are paying the fees. The financing company recovers the cost by tacking the fees onto the principal or charging higher interest rates both impact interest rates for the life of the loan.

Types of Refinancing

Refinancing is a good idea when interest rates have dropped, your credit score has improved, or interest rates are projected to increase. Switching from an adjustable-rate mortgage to a fixed-rate mortgage can save money and reduce the anxiety of skyrocketing interest payments. Reducing the interest rate on a mortgage by half a percent saves thousands in interest payments. Likewise, increasing monthly payments by $50 can decrease the total amount of interest on the loan. Cash-out refinancing is a fast way to access home equity. This method is a great way to get $10,000 or more for college expenses, renovations, and large investments. Cash-out refinancing can be used as an alternative to a home equity loan or line of credit, which generally have higher interest rates.

References:

Federal Reserve


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