Have you thought about taking advantage of the historic low interest rates? If you are considering a refinance on an existing mortgage, now may be the time to take action. As mortgage rates remain low, existing homeowners (who are able to refinance) are saving hundreds of dollars each month with lower interest rates.
While refinancing an existing mortgage could possibly save you an extra thousand dollars per year, there are several associated costs you must consider. One of the most expensive costs involved with completing a refinance of your home is known as an origination fee. This is the fee that banks and other lenders charge to the borrower in order to make their money.
It is important for any homeowner considering a refinance on their mortgage to fully understand the origination fees a lender is charging. In some cases, high fees charged to a refinance will actually cost a homeowner more money than what they are saving on lower payments. Here is some more information on what origination fees are and how they are typically calculated.
What are Origination Fees?
An origination fee is normally charged by a mortgage lender to cover the charges associated with a loan application. Most of the time this fee is included in a new mortgage loan as well as when refinancing an existing mortgage. There are some instances where a lender may run a special promotion that waves all or a portion of this fee, but those are not as common.
How are Origination Fees Calculated?
While the fees can vary among lenders, homeowners can generally expect an origination fee between 0.5% and 1%. This percentage is taken on the total amount of the loan. For example, if you were to refinance your home and the loan amount was $200,000, then you would pay a $2,000 origination fee if charged 1%. If your lender only charges 0.5%, then your origination fee would run $1,000.
Calculating Your Break-even
There can be several other costs charged on a home refinance (i.e. appraisal and title fees), but origination fees tend to be the most costly. As you consider a possible refinance of your home, it is important to calculate the break-even point as to when you will actually begin saving money.
If your total costs (origination, appraisal, title, etc.) for refinancing your home will total $3,000, then you need to determine how many months or years it will take to recoup these costs. Say you save an extra $150 per month in principal and interest on a refinance. You could then calculate that it would take just under 3 years (20 months) to break-even.
Final Thoughts
The thought of a lower monthly mortgage payment is exciting for many homeowners, especially with interest rates so low. It can be easy to get caught up in the monthly savings without looking at the overall picture. Factoring in extra costs, such as the lenders origination fee is necessary to get an overall idea of the potential savings of refinancing.
Have you recently refinanced? I would love to hear your story and experience on origination fees and factoring in all the costs of refinancing.
Related posts:
- Refinancing Your Mortgage Can Lower Your Total Costs of Owning a Home
- The 4 Most Unexpected Reasons Preventing You from Refinancing in the New Economy
- 8 Tips to Consider When Refinancing a Mortgage
- How Much Money Can a 15 Year Home Loan Refinance Save You?
- Should I Refinance My Mortgage?
Related posts brought to you by Yet Another Related Posts Plugin.
{ 4 trackbacks }