Is it the Right Time to Refinance My Home?
The interest rates have gradually come down in the past several months and many people are rushing to refinance their adjustable rate mortgage into a fixed rate mortgage or are looking to save a little money on lower monthly payments. But each homeowner must ask themselves, “How much does refinancing our home really cost?” Unfortunately most people do not realize the cost of refinancing. The long term savings of a lowered interest rate far exceeds the nominal fees at refinancing. However, these costs are important to understand before arriving at the closing table.
Most of the details regarding the type of mortgage you choose, i.e., the interest rate and the term of the loan, are decisions for you and your mortgage broker to discuss. However, it is your attorney who will be reviewing the costs on the Statement of Settlement or what is referred to as a RESPA form. This form itemizes all the fees, charges and upfront costs of the refinance.
First and foremost, the Statement of Settlement will list mortgage brokers’ fees, such as application fees, delivery fees and appraisal fees. Also, it is necessary for the mortgage company to research the status of payment on your property taxes with your local municipality. This is necessary in order for the mortgage company to set-up your tax escrows, which will allow you to pay your taxes on a monthly basis as compared to quarterly payments. In addition, this search will ensure that payments are current.
Next, there are fees to set up your escrow account. An escrow account is a fund or monetary cushion, which is held by the mortgage company from which your homeowners insurance, private mortgage insurance, taxes, or flood insurance are paid. These escrows are paid upfront at closing. The escrows amount to several months of insurance premiums and approximately one quarter of the taxes. The escrow can be accessed by the mortgage company to cover an unexpected increase without requiring an increase in your monthly mortgage payment.
In addition, the escrow is a security to you, as the homeowner, should you miss a monthly mortgage payment. If there is a missed payment, the mortgage company will make a withdrawal from the escrow to make a payment for the insurance premium to avoid a cancellation of the insurance policy, and will also withdraw funds to pay any taxes that are due to avoid a tax lien. Consequently, any escrows that are held by your original mortgage company will be returned to you several weeks after your refinance is complete.
Other charges that are listed in the Statement of Settlement are attorney’s fees, which include the fees involved in drafting the documents and obtaining mortgage pay-off information. Your title search fee is the cost that is associated with obtaining a report of clear title on the property which is being refinanced. You will also be required to pay fees to file your new mortgage, and to cancel your original mortgage. There may also be administrative fees associated with postage, faxes, wiring costs and overnight deliveries.
The final cost you will incur is the pay-off to the original mortgage company. This pay-off amount includes the remaining balance of the original mortgage, and a per diem interest rate and servicing fees. The pay-off amount will always be higher than the balance indicated on your last payment coupon as your last bills balance amount does not include the interest that has accumulated from the date of the last statement to the actual date of the pay off of the original mortgage.
Obviously, there are situations where the fee may include other items, like discount points and commitment fees to the mortgage company. It is important to ask your mortgage broker and your attorney about what fees you may be required to pay prior to arriving at the closing table. Please contact our office if you are thinking of refinancing.