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The cost to refinance a mortgage varies depending on the lender, the creditworthiness of the borrower, and market conditions. However, it’s possible to estimate the cost to refinance a mortgage as long as the borrower is aware of the fees and hidden costs that the bank or lender may charge during the process.

Lenders often advertise low refinance rates that can drop a homeowner’s mortgage by a full percentage point, but the costs associated with refinancing the mortgage may mean that rate reduction is less effective than initially assumed. For example, the extra costs may begin at the very start with a mortgage application fee.

According to real estate website Trulia, here are some of the standard costs a borrower may see when he or she decides to refinance a mortgage.

  • Fee for submitting the application
  • Appraisal to determine value and equity
  • Origination fee based on the loan’s value
  • Fee to prepare official mortgage documents
  • Flood certification in certain geographical areas
  • Title search and title insurance
  • Additional fees related to records and local charges

When speaking with a mortgage lender or bank, it’s a simple matter to obtain a list of fees associated with refinancing the loan. However, there are additional expenses that may impact the overall cost of the loan. For example, the method of amortization of the mortgage loan may have a larger impact on total cost than the interest rate offered on the refinanced loan.

Before deciding to submit an application for a refinanced mortgage loan, a borrower must go beyond the stated fees associated with the application. Borrowers may find it helpful to use the myFICO online tool for figuring out the total overall cost of refinancing the mortgage. The tool includes potential fees associated with the average mortgage like tax service, flood certification, running a credit report, and the recording fee.

Calculating Amortization Versus Interest Rate

In a traditional 30-year mortgage, the borrower will make payments for several years. At the start of payments, a significant portion of those payments will go toward paying down interest on the loan. In later years, a greater portion of the payments will go toward the principal.

What a borrower must understand is that refinancing a mortgage loan is essentially starting over from the beginning with the mortgage. A 30-year loan that the borrower refinances after paying for ten years will change in that more of the payments will go toward paying off interest, just as they did when the borrower got his or her original loan.

Closing Costs and Refinancing a Mortgage

As with all loans, the decision to refinance will come down to simple numbers. The average borrower should expect somewhere around 1.5% of the loan value to be paid in closing costs. On a loan of $200,000, for example, 1.5% of the closing costs would equal $3,000. With refinancing, the loan’s monthly payment might drop from $1,300 a month to $1,200 a month.

The $100 saved each month would equal $1,200 a year. That means it would take somewhere north of two years to recoup the costs associated with refinancing the mortgage. The decision to refinance depends on whether the borrower intends to remain in the home at least as long or longer than the time it would take to recoup the costs associated with refinancing.

In this scenario, a homeowner who planned to remain in his or her home for the next decade would likely see a financial benefit in refinancing. On the other hand, a homeowner who might move in just a few years might not see any real savings in refinancing his or her mortgage.

Considering Term Length and Overall Interest Paid

Other costs that need discussion include the total interest a borrower might pay, as well as the length of the new mortgage term. A borrower must calculate the overall amount of interest paid on the new loan, as well as whether extending the duration of the time spent making payments on the house is worth it.

For example, a 30-year mortgage where the borrower has already made ten years of payments could turn into a total of 40 years of payments if the borrower decided to refinance with another 30-year term. It could be in the borrower’s best interest to refinance to a shorter term of 15 or 20 years, which wouldn’t lengthen the overall number of years spent paying on the house.

Responsible Borrowers Examine All the Numbers

Any borrower interested in refinancing his or her mortgage should take three steps in determining the actual costs to refinance.

  1. Obtain lists of fees required by each lender under consideration
  2. Compare closing costs and monthly savings associated with the new loan
  3. Determine the number of years it would take to realize those savings

Armed with this knowledge, a borrower can make an accurate decision as to whether refinancing a loan would save money over the course of payments made on the mortgage.