How Refinancing Fees Break Down

When interest rates go down, as they have in recent years, many homeowners with fixed rate mortgages begin to think about refinancing in the hope of cutting their interest rates and monthly payments. Because refinancing costs money, one cannot simply refinance every time interest rates go down to get lower monthly payments. To get a good idea of whether or not you should think about refinancing, you can compare the cost of the procedure to the length of time that is needed for your savings to cover that cost. If the payback comes in a couple of years, then the move to refinance may make sense. If not, consider waiting to see where interest rates go next. Before you can begin to make this analysis, it is helpful to understand how the costs of refinancing are broken up.

Does your lender charge prepay fees? If it does, then you will have to pay these in the process of refinancing since you have to pay off your old loan with the money from the new one. Because the prepay fee can be very large for those banks that charge it, it should be an important cost to consider before making refinance decisions.

Every time you decide to refinance there is an interest cost. When you pay off an old loan with a new one with the same scheduled pay off time that the first one had in the beginning, then you are stretching your debt out longer than if you were to have stayed with the original loan. Also each new loan must go through the same period at the beginning of high interest low principle payments that work in the lender’s favor. Even though the interest payments for a refinanced loan may be lower and you will have achieved lower monthly payments, the lower rate is unlikely to cancel out the cost of paying interest over a longer period of time.

Deed, administration, appraisal, and other fees may also contribute to refinancing costs. The second two fees can be changed if you are willing to negotiate with your lender and any third-parties involved whereas the deed aspect tends to be set.

Some banks give their borrowers the option of adding the costs of refinancing into the loan they are borrowing rather than paying the fees upfront. Sometimes lenders choose to bundle the cost of refinancing into what interest rate they charge. Other times they will put the cost on the borrower’s tab by increasing the principle that needs to be paid back.