For those who own homes around the country, there is inevitably a time when you wonder if you should look at the cost of refinancing your mortgage, as well as the process. You may already be set to lock in your rate and sign papers. Or you may have no idea what any of this means.
Let’s spend some time looking at the whole refinance process and the costs associated to help you determine if it is right for your situation.
First, What is a Refinance?
A mortgage refinance is simply the process of getting a new loan on your property. The old mortgage is paid off during the refinance, and you sign papers agreeing to new terms. Why would someone want to set up a whole new mortgage?
Here are several good reasons for refinancing your existing home loan.
1. Lower the Interest Rate
The Federal Reserve meets approximately eight times per year in its role of directing the nation’s monetary policy. Part of its job is to determine if federal interest rates should be raised, lowered, or remain unchanged. Experts wait anxiously each time the Fed meets, eager to see what will happen to the rates. If the current interest rate is lower than that of your existing mortgage, it may be worth refinancing to take advantage of the lower rate.
2.Take Cash out for Other Uses
Equity is the difference between what you currently owe on your home and the value of the house. If you have enough equity built up in your home, a refinance may allow you to access some of it as cash. You can then use the money to pay off credit cards, finish home improvement projects, etc.
3. Shorten the Term of the Loan
Some people choose to refinance their existing 30-year mortgage into a 15-year loan. If you can handle the larger monthly payment, this option has the potential to save you a lot of money in the long run.
4. Switch From an ARM to a Fixed-Rate Loan
Many buyers get into an adjustable rate mortgage, or ARM, in order to purchase a home. This type of mortgage has a fixed rate for a specified amount of time, usually five years, and then the rate is adjusted each year after that, based on the Federal Reserve. Once the rate starts moving, many homeowners choose to refinance to a conventional fixed-rate mortgage.
What Does it Cost to Refinance?
As with any loan package, there are costs to refinance. Depending on the lender and the state in which the loan is made, there may be of fees to take into account. Here is a look at several common mortgage refinance costs.
This fee is typically about 1% of the requested loan amount and is payable whether the loan is approved or not.
The lender will order an appraisal to ensure the home is worth enough to make the loan feasible. The national average cost for an appraisal is around $450. This fee is non-refundable, even if the property does not appraise high enough to qualify for the loan. In some instances, you pay the appraiser directly.
Most lenders require at least a basic inspection of the property’s plumbing, electrical and HVAC systems. The inspector typically also examines the roof and checks the house for signs of pests or infestations. Nationally the average price for home inspections is just over $300.
Lenders hire surveyors to verify the property line to maintain accurate records of the home’s legal boundaries. This fee is generally around $250.
Loan origination fee:
This is where the lender makes the bulk of its money for processing the loan. The loan origination fee is usually around 1% of the loan amount, but you may be able to negotiate with the lender for a lower rate.
Title search fee and insurance:
A title company will research the property to ensure it is not subject to any liens or litigation so the lender knows you can legally own the property. These fees also help mitigate any legal costs that arise during the search. Plan around $700-$900 for this part of the process.
Documents preparation fee:
You know the giant pile of papers you sign to complete the mortgage process? Expect to pay several hundred dollars for the preparation of all of those documents. This fee is generally part of the closing costs.
Not every state requires an attorney to review the documents, but even when it isn’t needed, it is a wise idea to take advantage of this expertise. The peace of mind is worth the cost. These fees are highly variable depending on the attorney’s rates.
Lenders will request a certificate showing whether or not the property is in a federally designated flood zone. If it is, flood insurance will likely be added to the life of the loan. Many lenders will waive the fee for obtaining this certificate, so it is worth asking.
After all the papers are signed, the transaction is recorded with the local government officials. The municipality sets the cost for this service.
Is Refinancing Right for You?
Although it seems like a hefty list of costs for refinancing, it is still a wise financial decision for many homeowners. There are a lot of benefits to refinancing your mortgage.
If your goal is to lower your interest rate, experts suggest that it is worth the cost of refinancing if the new rate will be at least .75% lower.
If you are looking to do a cash-out refinance, you may be able to use your home’s equity to improve your finances by paying off high-interest credit cards or by increasing your property’s value with home-improvement projects.
There are many options available for homeowners wishing to refinance, allowing them to improve their long-term financial health. Solarity Credit Union is just a phone call away, and our friendly experts will gladly craft a refinance package that makes sense for you.