How to Really Evaluate a Refinance Deal

February 25th, 2010

It’s hardly uncommon now to see mortgage ads that offer a no-point, no-fee refinance. Say you use a mortgage calculator, and the numbers look great: On your $325,000 mortgage, you can refinance from 5.75% to 5.00% and save about $150 per month. Sounds like a no-brainer decision. Or is it?

No-Fee Mortgage Refinance

A no-fee mortgage sounds great, but what is the description of a “fee?” Any mortgage transaction, whether a home loan for purchase or refinance, involves many parties and companies, all of whom must be paid as a result of the transaction. Nobody works for free, including settlement agents, inspectors, appraisers, title companies, and mortgage companies. But who pays them, and how much? When you’re quoted a “no-fee” mortgage, make sure that your mortgage lender or broker will be paying all the fees, not just their own.

Taxes

Does your refinance quote include taxes you will be paying or prepaying as part of your transaction? While not a “fee,” taxes must be paid either by adding them to your mortgage balance or by you paying cash at closing. In many states, homeowners going through a mortgage refinance are surprised to see they must pay a “mortgage recording tax.” This tax could be as low as $1.50 per $1,000 in Alabama or as high as 2.12% in New York City. If your $325,000 mortgage is in New York City, be prepared to add over $6,800 to your mortgage as part of the transaction–and there goes your monthly savings.

Good Faith Estimate of Your Refinancing

When considering a mortgage refinance, ask your mortgage broker or lender to send you a Good Faith Estimate and Initial Fees Worksheet detailing all the costs, fees, and money brought to closing. Are property taxes listed? Insurance premiums? Settlement fees? Appraisers? With a detailed list of all the costs and fees of your transaction, you can go back to your mortgage calculator. Are you still saving $150 per month? Is your loan amount still $325,000?

The lesson: When calculating if a refinance makes sense for you, count all your costs rather than rely on the “no-fee” assumption.

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