Refinancing your home mortgage for a lower interest loan or one with a shorter term can potentially save you a bundle. And consolidating all of your high-interest debt into this new loan could add savings on top of savings, both monthly and over the life of the loan.

But notice that the key word there is “potentially”. Is refinancing, therefore, the right financial move for every individual? One rule of thumb states that when you can get an interest rate that’s 1.5- to 2% lower than your current rate, it may be time to consider refinancing.

Refinancing can be worthwhile, but it does not necessarily make solid financial sense for everyone. There are a number of things that must be considered, such as how long you intend to stay in the home after the refinance. Most sources agree that it takes about three years to recoup the costs associated with procuring the refinancing and begin to realize the savings from the lower interest rate.

Who benefits the most from refinancing? Well, those who refinance for the right reasons stand to receive the most financial benefits. For example, people who want to convert their adjustable-rate mortgage to a fixed rate in a market with rising interest rates are probably making a sound financial decision. Also, those who want to build their equity more quickly by converting to a shorter-term loan, or people who want to draw on the equity that they’ve already built up in their house to get cash for a major purchase or expense, will all likely benefit from refinancing.

What are the costs of refinancing? Costs can vary significantly from lender to lender and from area to area, so we will suggest only general estimates here. Your actual closing costs may be higher or lower than the ranges indicated below. Always consult your lender and ask questions. You should receive a Good Faith Estimate of the costs of the loan.

  • Application Fee: $50 - $300 - This charge covers the initial costs of processing your loan request and checking your credit report.
  • Appraisal Fee: $250 - $400 - This fee pays for an appraisal, which is a professional estimate of the value of the property.
  • Home Inspection Fees: $175 - $350.
  • Homeowner's Hazard Insurance: $300 - $600.
  • Lender's Attorney's Review Fees: $75 - $200 - If not conducted at the lender’s offices, they will usually charge you for fees paid to the lawyer or company that conducts the closing.
  • Loan Origination Fees: 1% of loan value - This is charged for the lender's work in evaluating and preparing your mortgage loan.
  • Private Mortgage Insurance: 0.5% - 1.0% of loan value - Insurance required by lender for certain loans with a loan-to-value (LTV) of 80% or greater.
  • Points: 0% - 3% - Prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals 1% of the loan amount.
  • Prepayment Penalty - The mortgage documents for your loan will state if a prepayment penalty exists.
  • Title Search and Title Insurance: $300 - $600 - This charge will cover the cost of examining public records to confirm ownership of the real estate, and the cost of a title insurance policy.

The average cost of refinancing is usually in the range of three- to six percent of the value of the loan, plus any prepayment penalties and charges associated with paying off any second mortgages that may exist.

Whether refinancing is right for you depends upon your own personal situation with regard to your financial objectives and goals. Run the numbers to see what’s best for you. Use our Mortgage Calculators to determine your potential costs and savings.

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