Consumers who rush to refinance because they are teased with getting a lower interest rate may not be getting a good deal after all. Even though they may end up reducing their monthly payments, the fact is they may be paying out more over the lifetime of their loan if they decide to jump into a different mortgage.
According to the Federal Reserve, there are a number of reasons why a consumer should NOT consider diving into a new mortgage.
First, if a mortgage holder refinances late in their mortgage, they will recapitulate the amortization process. By restarting the amortization process, the consumer’s payments will once again be mostly credited to paying interest and not towards building equity.
Next, a consumer should consider if their current mortgage carries a prepayment penalty. A penalty fee for paying off the loan beforehand can be imposed by lenders that stated the potential charges in the mortgage paperwork. Prepayment fees can range from one to six months’ interest payments. However, sometimes this penalty can be waived if the debt holder decides to refinance with the same lender. Consumers should weigh the cost of the prepayment fee against the expected savings from a new loan.
Third, a homeowner that is planning on relocating to a different area in the near future should calculate the cost of refinancing comparing it the potential savings of the new loan. The savings benefit should exceed the cost of entering into a new mortgage.
Some examples of potential settlement cost that may come with refinancing a home loan include:
- A application fee that can range from $75 to $300.
- Fees charged for loan origination can range from 0% to 1.5% of the loan principal.
- Points can range 0% to 3% of the loan principal ( Points are equal to one percent of the amount of the mortgage loan and are sometimes paid to reduce the interest rate or can be charged by the lender or broker so they can earn money.)
- A cost from $300 to $700 for the home appraisal.
- The inspection fee can range from $300 to $700 to determine the structural condition of the home.
- Attorney fees can range from $300 to $1000.
- A title search and insurance on the title can range from $700 to $900.
- Loans insured by the Federal Housing Administration (FHA) can come cost the homeowner 1.5% plus ½% per year, while loans insured by the Rural Development Services (RDS) can cost the consumer a extra 1.75%. A Department of Veterans guaranteed loan can add 1.25% to 2%. Conventional loans insured by PMI or otherwise called private mortgage insurance can add a further 0.5% to 1.5%.
- Survey fees can cost the homeowner a additional $150 to $400.
Finally, lets not forget the part that a almighty credit score has to play in the refinancing process. According to Bad Credit MD , a consumer may not be able to get approved for the low advertised interest rate if their credit is not satisfactory to the lender’s criteria. Even fractional interest rate increases can cost the consumer in potential savings. Borrowers should consider checking their credit report with all three reporting agencies to make sure that all the information is current and up to date.
Most of the information a current mortgage holder will receive on refinancing is from promotional advertising material that can come in the mail, seen on the internet or television and heard from the radio. According to the Federal Trade Commission (FTC), some may even be deceptive so its important to know the facts to all the features that will be applied to your new mortgage.