Mortgage refinancing is a standard saving technique among homeowners. When applicable it can save money for a household. Mortgage payments account for the single largest expense in most homes. Any saving in them can improve the bottom line. There are many benefits of mortgage refinancing. For example: For a loan of $250,000 for 30 years a drop in interest rate from 5% to 3% will look like this:
|Interest Rate||Total Interest Paid|
As you can see in above table, a drop of 2% in interest rate would result in a massive saving of $102,758. So if you can find a lower interest rate, it is better to go for mortgage refinancing. However, refinancing is not without pitfalls. There are many hidden costs associated with it. Let us discuss some of the significant hidden costs that can influence your decision.
Amortization is a method of applying monthly installments towards the loan. In the beginning your monthly payments are first applied toward interest, and then only a minor percentage is applied towards the principal amount. It means that the loan amount decreases very slowly in the beginning years and your equity in the home is also building slowly. However in later years payments are first applied towards loan amount and then upon interest. So if you refinance all this amortization would start from level ZERO. Amortization is relevant when you have been paying monthly installments for many years.
The prepayment penalty is a big concern for those of us who want to pay our loans earlier. It is usually conditional and can amount up to six months of interest payments. Carefully check your current loan documents for any prepayment penalty.
Mortgage refinancing is like applying for a new loan and closing the old one. An Application fee of up to $300 is applicable in most cases. In the event of loan denial, the application fee is non-refundable. The second fee charged on loan processing is called loan origination fee. This fee might amount to 0% to 1.5% of the total loan value.
The new loan requires new property evaluation. Lenders need this report to decide about the loan amount and other terms and conditions. Also, current market value of your home may be less than your old appraisal report. In this case, you might need to pay some upfront costs. The lender might also ask you to buy mortgage insurance for loan approval. The price range of an appraisal is $400 to $800.
A new inspection report is usually required to judge the current state of the house. A qualified home inspector will inspect your home for structural stability, pests, termites and other common building problems. This inspection fee can cost up to $400.
The bank may hire an attorney to close the transaction. You can negotiate the charges. However, some lenders might charge you the attorney fee. It can be up to $1,000.
Flood evaluation certificate is mandatory in coastal areas or areas near other bodies of water. This report helps the lender to decide whether your property is in the safe zone or not. If your home is in flood zone, you will also need flood insurance.
Local county, city or community in which your property exists can charge a fee for doing the paperwork and data entry.
Title search or title services show that the seller transferred the ownership to you. Title insurance gives security to the lender. If a dispute of the property or lawsuit occurs in this regard, then this insurance policy will help. Both of these fees might be applicable for mortgage refinancing. Spare $800 to $1,000 for this.
All the paperwork, visits, research and follow-up needs lots of your time. You know the price of your time, and no one will pay for it. Consider the cost of your time, your effort, and money before deciding whether refinancing is the right solution for you.
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