Wednesday, September 16, 2009

Real Cost to Refinance your Home Mortgage

While home mortgage rates continue to stay near historical lows, many homeowners have taken advantage and decided to refinance their home mortgages and keep their money in their pockets. But a new low interest rate isn't the only thing you need to consider. There’s a little matter of what fees will be incurred. So just how much should it cost you to refinance you currant home mortgage?

Because no two mortgage companies are alike, it's difficult to say with precision what it is going to cost you to refinance your mortgage. Generally you can expect to pay about 2 to 5 percent of the new loan amount in fees when you refinance. It's important to keep the cost in mind when shopping for a new mortgage to replace the old one.

While it's not necessary to refinance with the same lender who currently holds your mortgage, it's a good place to start. They may offer a stream lined refinance process that will piggyback on costs you incurred when you took out your present home mortgage. But don't stop there, no matter how good their offer may appear. You need to check with several different lenders to determine what kind of rates they offer and the costs involved in refinancing with them. Be on the lookout for mortgage companies that quote you a low rate but throw on a lot of junk fees and unnecessary charges.

So what are some fees you can expect to pay when refinancing? Let’s take a look, but keep in mind everything is negotiable.

  • Application fee: This fee is supposed to cover the cost of processing your home mortgage refinance request so the lender can decide whether to lend you the money and at what rate. Generally they cost between $50 and $500 and include the cost of your tri-merge (home mortgage credit report). I know some people consider this a legitimate charge. I disagree. Mortgage companies and banks spend big money in their effort to get people to do business with them. Now they have a live customer sitting across the desk from them and they expect to charge you to see if you will do business with them! That’s like walking into the car dealer show room and giving the salesman $200 to show you a car they will sell you. Look, at one time there may have been cost involved to manually qualify a borrower for a home loan. But those days are long gone. Today it all automated desktop underwriting. I may cost 20 bucks to pull a tri-merge but beyond that it's a couple of strokes on a keyboard and in a matter of seconds a decision is made. I think charging you for the Tri-merge credit pull is cheesy and have never paid for my credit report much less a mortgage application fee .
  • Appraisal fee: While a lot of folks can't understand why they need another appraisal since they had one done when they purchased their house. You need to understand just what an appraisal is. It's nothing more than an opinion of your home's value at a particular moment in time. While this was more of a sticking point in the past when home values only seemed to go up. Today, reality has set in and it's not unreasonable for a lender to want to make sure their loan will be sufficiently collateralized. They generally cost about $350 for a residential appraisal. Multi units and commercial properties can expect to cost significantly more. Also it is worth inquiring whether the lender will accept and update from the previous appraiser as this can save you a couple of dollars.
  • Title insurance: This protects the lender in case there is ever a question as to encumbrances and clouds to your title. Should someone make a claim against you ownership and some other issues that are just beyond the scope of this post. While the cost is determined by the loan amount, typically they cost between two hundred and fifty and a thousand dollars. For a little bit more you can acquire an owner’s policy that will protect YOU for as long as you own the property. The lenders policy will expire when his interest in the property does (when the loan is paid off). But if you are refinancing and can use the same title company they will offer a refinance transaction discount.
  • Loan origination fee: This is the charge brokers, lenders and banks get for doing (originating) the home loan. Since most home mortgages are quickly sold to other investors on the secondary market originating is where their money is typically made. You can expect to pay 0 - 3 percent of the loan amount. If there is no origination fee, chances are it was just passed on by way of a yield spread premium in the form of a higher interest rate. Let me climb up on my soap box for a moment. I don't begrudge someone making money doing home mortgages. I my opinion a fair fee is $1,500 to $3,000 depending on the difficulty of the deal. In my mind there is no justification for charging one person $3,000 for putting together a particularly hard $100,000 mortgage and $9,000 because the loan amount is $300,000, yet it's done every day and in my opinion is just soaking a borrower. Please keep in mind, everything is negotiable.
  • Points: This is an area of so much abuse and misunderstanding that the scope of this post cannot do it justice and well be dealt with in a latter article. For now, you need to understand that a point equals 1% of the loan amount and are used to buy down your interest rate. In practice it is nothing more than pre paid interest.
  • Junk fee: These are all those other fees you may see on a good faith estimate or Hud1 that really should be part of the origination fee. They will have names like doc prep free, administrative fee, transfer fee, courier fee. You need to question the loan officer when you see any fee that you consider was or should have been paid for as part of the origination fee.

You should now have a better understanding of how the decision as to whether refinancing you home mortgage is a lot more than can you just get a better interest rate. If you are not going to recoup the cost of your home mortgage refinance there really isn’t much sense to doing so. It’s really that simple.