Ask Stacy: Can I Really Refinance My Mortgage at No Cost?

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Mortgage lenders claim you can refinance to a lower rate at "no cost." Not true.

Mortgage interest rates are still near historic lows. But as the economy continues to improve, so do the odds of higher interest rates. So now could be a great time to refinance. But before you consider a new mortgage with a lower rate, consider all the costs.

Following is a question I originally received back in 2010. While the numbers may have changed a bit since then, the advice remains the same.

My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee for a rate of 4.5 percent. My current rate is 5.375 percent, and I have had this mortgage since 2008. My principal is $144,423, and I’m paying about $192 in principal each month and $647 in interest.

Anyway, would that make sense for me to do this refi? The only catch is that my 30-year fixed loan would start over now – so I’ve been paying already for 2 1/2 years, which would mean I start from scratch again.

What’s more beneficial for me? The difference in price each month is about $100 less if I get the refi at 4.5 percent. They are also offering me to get a 20-year fixed loan at 4.5 percent, which would increase my monthly payments but decrease the payment overall. What should I do?
– Corinne

Here’s how Corrine – and anyone else in her situation – can figure out the refinance question.

The idea is to divide the cost of the refinance by the monthly benefit received. That will reveal how many months it will take to make the refinance profitable.

For example…

If the fees you pay to refinance are $2,000 and you save $100/month as a result, it will take 20 months to recoup your cost. If you’re going to stay in the house exactly 20 months, you break even. If you move sooner than that, you lose money. For every month you stay longer, you come out $100 ahead.

Corrine says above that she’ll have no cost to refinance: “My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee.” But there’s no such thing as a fee-free refinance. I can use myself as an example – I refinanced my mortgage a couple of years ago. Here are the expenses I paid:

Recording Fees: $175.00
City/County Tax Stamps: $ 600.00
State Tax Stamps:              $1,050.00
Credit report:                       $25.00
Underwriting Fees:           $595.00
Escrow Fee:                           $150.00
Title Search:                           $165.00
Title Insurance:                  $1,125.00
Title Endorsements:          $140.00
Express Mail:                         $75.00
Total Expenses:  $4,100.00

I did lots of negotiating to keep my expenses low (see Mortgage Shopping 101 – Negotiating) and for the most part I was pretty successful. The fee associated with the actual mortgage loan – the underwriting fee – was $595.00. But as you can see from the above list, that’s not all there is. In my state (Florida) there’s no negotiating title fees and tax stamps and there’s no getting around them. They’re set by law.

So when approaching a refinance, be aware of the entire cost of refinancing your mortgage. No lender can waive costs they don’t control, and as you can see from my example above, that can amount to a chunk of change.

In addition, there could be a very high charge in this refinance that’s virtually invisible – the interest rate that Corinne is agreeing to pay for the next 30 years.

If Corrine agrees to pay 4.5 percent when 4.25 is available elsewhere, that quarter-percent is money the lender is making and Corinne is losing. That’s why you’ll often see lenders offering “no-fee” mortgages: Sure, there’s no underwriting fee, like the $595 I paid. But these loans are often at higher rates, which results in the lender making a lot more than if they’d charged $595.

Bottom line? If you’re considering a refinance, go into it with your eyes fully open. Find out how much it will actually cost to refinance a mortgage where you live, including government and closing costs. Then, shop your rate hard. Check out a mortgage search tool like the one we have here, ask around locally and talk to your existing lender. Only after uncovering all the costs and the most competitive rates will you be in a position to make an informed decision.

As far as a shorter mortgage – 20 years instead of 30: As with any loan, the shorter the term, the less interest you pay. The less interest you pay, the richer you are. So you should always take out the shortest loan possible. Of course, shorter loans mean higher payments. But if that’s a problem, no worries. Take out the longer loan with the lower payments, then pay extra every month when you have extra cash.

Stacy Johnson

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