When you refinance, you pay off an existing mortgage
and take out a new one. An important factor in deciding
if you should refinance your mortgage is understanding
just what’s involved in the process, the costs and
fees you’ll have to pay, and how long it will take
you to recover those costs. When you refinance, you
generally will repeat many of the same steps, provide the
same information, and encounter the same types of costs
that were involved the first time around. See the
Mortgage Loan Interview Application Checklist.
How the Lender Views Your Application
The lender’s decision whether to approve your
loan application will again be determined by an
evaluation of the following.
Capacity
Do you have enough income to repay the debt?
Credit History
Will you repay the debt? This assessment will be base on how much you owe, how much
you borrow, whether you pay your bills on time, and
whether you live within your means.
Capital
What are your assets, including the equity in your
home?
Collateral
Based on current market conditions,
how much is your home worth? Will the lender be
protected if you fail to repay the loan?
Costs
Involved in Refinancing
Because you are applying for a new loan, you may have
to pay many of the same fees associated with the original
purchase of your home, including an application fee;
title search and
title insurance fees; the cost of an
appraisal; a loan
origination fee; and any discount
points, prepayment penalties, and any legal service fees
relating to your loan.
Sometimes, a new appraisal will not be necessary. In
addition, some of the fees and closing costs may be
waived. If you decide to refinance with your original
lender, you may be able to negotiate a reduction of
points or a waiver of the title search, application,
credit check, or other fees. Even if you select a new
mortgage lender, the new lender may be willing to negotiate these
fees as well. Some lenders offer “no-cost”
refinancing, which means that you do not have to pay
most of the fees generally required; however, lenders
generally will charge a higher interest rate for this
type of loan. Be sure to ask the lenders you contact if
they offer “no-cost” refinancing or if some, or
all, of the refinancing fees and costs can be waived.
Application Fee
This fee covers the lender’s cost of processing your loan
request.
Appraisal Fee
This fee pays for a professional appraiser to estimate
the market value of the property. The appraiser looks at
what the home is worth today and how the neighborhood may
affect future property value.
Credit Report
The lender orders a credit report on you and any
co-borrowers to verify the information you’ve
already supplied on your loan application and to see how
you’ve handled past debt and credit accounts.
Discount Points
The lender may ask you to pay "discount points" up front in exchange
for a lower interest rate on the loan. One point is equivalent to one
percent of the amount you borrow.
Legal Service Fees
The lender usually will charge you for fees paid to
the lawyer or company that conducts the closing. You may
also want to hire your own attorney to review documents
and represent you throughout all stages of the
transaction.
Loan Origination
Fee
This fee covers the lender's work in evaluating and
processing the loan. It usually is expressed as a
percentage of the loan.
Miscellaneous Fees
Depending upon the type of loan you have and other
factors, additional expenses you might face include the
fee for a Department of
Veterans Affairs (VA) loan guarantee,
Federal Housing Administration (FHA)
mortgage insurance, or private mortgage insurance (MI).
Prepayment Penalty
Your existing mortgage may have a prepayment penalty
clause. This means that if you pay off your existing
mortgage earlier than the terms stated in the contract,
you may be required to pay an additional amount, usually
a percentage of the outstanding principal, as a penalty.
Laws in many states prohibit or limit mortgage prepayment
penalties. Check your mortgage documents or ask your
lender if your mortgage contains a prepayment penalty and
if a prepayment penalty can be enforced in your state.
Survey
The lender may order a new survey of your property to
ensure that nothing has changed about the land and physical
structures that would affect a future sale.
Title Search
and Title Insurance
This charge will cover the cost of examining the
public record to confirm your ownership of the property.
It also covers the cost of a title insurance
policy, which insures the lender in a specific amount for
any loss caused by a discrepancy in the title to the property. An owner’s
title policy protects your ownership interest in the property. You
should ask the company carrying your present title
insurance policy if it can reissue it at a reissue
rate, which may save you money.
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