Refinancing a home mortgage offers many benefits. A lower interest rate results in significant savings and mortgage payments, foremost. With the benefits, though, there also are several drawbacks to refinancing a home mortgage. Refinancing could be expensive for many homeowners. LendingTree.com estimates that refinancing will cost most homeowners to 6% of the outstanding principal plus the costs of any penalties required by the first mortgage holder. Understanding these costs allows homeowners to compute if the benefits of refinancing outweigh the costs.
Closing Prices
When you seek to refinance your mortgage, the lender often requires you to pay various fees. These charges, known as closing costs, assist the lender determine the condition and value of your property. The specific charges include an application fee, which goes toward processing your loan and assessing your own credit history, and an assessment fee, which can be used to pay someone to ascertain the worth of your home. The other fee is assessed for the title search and title insurance that must be paid.
Loan Origination Fees
This fee is a finance charge added by the lender at closing. The fee is assessed as a percentage of the amount of the loan. The fee is expressed in points. Each point is equal to 1% of the amount of the loan. Points can vary from one to three. In some cases, points are compensated as part of the closing prices. In addition to the original amount of the loan , though they are financed in other circumstances.
Prepayment Penalty
In addition to how much must be paid into the new lender, many homeowners need to pay the lender who provided the mortgage. This payment is known as a prepayment penalty, and it’s a charge used from the original mortgage lender designed to dissuade refinancing and be certain that the lender earns money on its investment. Prepayment penalties, frequently figured as a percentage of the outstanding balance of this loan, are subject to state regulation and also vary by the type of loan and lender. They are not permitted on several loans, including FHA and VA loans. The terms will be described in the mortgage documents When a prepayment penalty is needed. The punishment expires after a certain length of time.
Interest Consideration
Based on MSN Money writer Liz Pulliam Weston, most homeowners are unaware that they pay 85 percent in interest during the first couple of years of a 30-year mortgage but pay more toward main in the latter years of a 30-year mortgage loan. You start paying interest , when you choose to refinance. Weston says homeowners who keep refinancing are unaware that the outcome is significantly delaying their ability to build equity in their houses.