Six Hidden Costs of Refinancing Your Mortgage

Six Hidden Costs of Refinancing Your Mortgage

Refinancing your mortgage is a great way to save money on the life of your loan. But you should know the extra fees associated with refinancing to see if this is the most cost efficient option for you.

With mortgage rates at rock bottom lows and staying at near these record lows for several weeks, the option of refinancing your current mortgage may seem like an enticing deal. And for many homeowners, it can save you thousands of dollars over the life of your loan. But that’s only if you are careful during the process of refinancing your mortgage. There are many hidden costs that are often bundled into a refinance and some of these costs are avoidable if you know what to look for. Here are six of the most common hidden costs that you should know about when you refinance your mortgage.

Loan Origination Fees

The loan origination fee is a common cost of refinancing your home. This fee is charged for evaluating and preparing your loan documents. You typically can’t avoid this fee, but you can shop around to different mortgage lenders and find the one that charges the least for the origination fees. These fees can generally be as much as 1.5 percent of the principal, but you should be able to find lenders that charge much less than that.

Application Fee

When you apply for a refinance on your mortgage, you are going to pay an application fee. This is a fee that you pay upfront and the lender will keep this fee even if you get denied for a mortgage refinance. An application fee generally costs between $75 and $300 depending on the particular lender and other factors, but you can usually negotiate this cost to drop it down or even have it waived in some cases.

Appraisal Fees

The appraisal fee is not always necessary when refinancing your home. If you have had an appraisal in the last few years, your refinancing lender may waive this fee which can cost you and extra $300 to $700 depending on the size of your home, the area where you live and the mortgage refinancing company that is handling your loan.

Inspection Fees

Depending on the length of time you’ve owner your home, your refinancing lender may require an inspection of your home. The home inspector will check for termites, structural damage, pests and other things that could impact the overall value of your home. Inspection fees can cost up to $350 but if you have only had your home for a couple years, you may not need to pay this fee.

Attorney Fees

When you refinance your home, you generally have to pay fees for attorneys to conduct the closing of the deal. Lender fees can cost  between $500 and $1,000 depending on how much has to be done for your particular refinancing transaction, the principal balance and other factors.

Prepayment Charges

As with many mortgages, you may be charged a fee if you pay off your loan early. This is also true with refinancing your mortgage. When you refinance, be sure to read the fine print on the refinancing contract. You could be charged extra fees which could be as much as six months’ worth of interest payments if you decide to pay off your mortgage sooner than the contract has scheduled.

Refinancing your mortgage can save you thousands of dollars over the long run. But if you don’t consider these costs and add them into your expected charges, you may not be saving any money at all. Do your research and add up the costs before making your final decision to refinance.

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Four Strategies for the Home Seller Where the Appraisal Comes In Below the Offer

Four Strategies for the Home Seller Where the Appraisal Comes In Below the Offer

With so many homes dropping in value in recent years, many home sellers are getting “sticker shock” when they get their appraisal. What do you do if your home appraises for much less than what you expected?

There are many reasons to get your home appraised. One reason is to assess the amount of property taxes you are required to pay. If you are going through a divorce, you may also need to get your home appraised. In cases like these, you may want your home to be appraised at a low value because it would save you money.

However, if you are planning to sell your home, you want your home’s appraised value to be as high as possible so you can get a better price for it. In most cases, the home buyer’s bank is going to conduct a home appraisal because the results of the appraisal will help the bank determine if they are going to loan the money to the buyer to purchase the home. Unfortunately, this appraisal value often comes in much lower than the seller expects. So what should the seller do? If your home appraises for a lot less than what you thought it would, here are some options that you can use.

Drop the Sale Price of the Home

The most common thing to do if your home appraises for less than you expected is to drop the price. Many appraisals occur after a buyer agrees to purchase the home pending certain procedures, including the appraisal and the home inspection. But if you have a higher price on your home than the actual appraised value, it will be nearly impossible to get the price you want for it. If you drop the sale price, you can often negotiate with the buyer for other things, such as asking them to pay the closing costs or asking them to make some of the repairs that need to be done before the home sells. It is often better to give a little on the price rather than to cancel the transaction (in which case the buyer gets back any escrow money and you need to relist the home).

Cancel the Transaction

Many home sellers make a rash decision to cancel the sale of the home when their appraisal comes in much lower than they expected. This is a viable option, but it may not be the best decision for the seller who really wants to sell their home.  Once the agreement is canceled, the seller essentially has to go back to square one to find another buyer who is willing to buy without a mortgage contingency (rare) or to hope that the appraisal associated with the next offer is closer to their selling price. In many cases, the buyer simply takes their home off the market for awhile.

Offer a Second Mortgage for the Difference

If the seller really wants to sell the home and the buyer is motivated to purchase it, the two parties may be able to work out an agreement in which the buyer pays the seller the difference in payments or as a lump sum at a later date, with or without interest.  This is obviously not a viable alternative for the seller who is going to lose sleep over the buyer's credit, and you should seek legal counsel concerning potential ways to get collateral.

Ask for a Second Appraisal

There is nothing wrong with getting a second opinion about the value of your home. Appraisers do make mistakes from time to time.  According to the terms of the buyer’s offer, you may be able to ask the buyer to pay for the second appraisal.  Alternatively, you may offer to pay for it yourself if the buyer agrees not to cancel the transaction on the basis of the first appraisal. Find a qualified, independent appraiser with a good reputation in your local area to make sure your appraisal is done correctly.

These are just a few things to keep in mind if you are selling your home. It is often a good idea to get an appraisal before listing your home so you have an idea of its current market value and you won’t be in for too many surprises once you find a buyer for it.

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Understanding Amortization and How the Mortgage Loan is Paid Down (and Off)

Understanding Amortization and How the Mortgage Loan is Paid Down (and Off)

Before purchasing a home it is important to review and understand mortgage amortization or how your mortgage loan will amortize.

If you have recently started looking for a home or researching the mortgage industry, you have probably heard the term “amortization” more than just a few times. The word sounds fancy, but it involves a very simple concept. Here is a brief discussion about what amortization means so you can have a better idea about what lenders and mortgage professionals are saying when they use that word.

  • In basic terms, amortization or mortgage amortization refers to reduction in the principal balance of the loan over time due to payments allocated to principal (as opposed to allocated to mortgage interest or to “servicing” the mortgage) on a fixed schedule.
  • The word “amortization” is derived from the Latin root “mors,” which literally means “to die.” So you can think of amortization as “killing” your mortgage loan over time through scheduled payments.
  • At some point, your mortgagor will present you with an amortization schedule.  This schedule demonstrates how much of each mortgage payment will be applied to the interest on the loan and how much is applied to the principle of the loan – or, to amortizing the loan.  An amortization schedule will ordinarily show that where you have a constant interest payment, a greater part of each payment over time will be allocated to amortization of principal than in the month before.  Comparing amortization schedules for different loans (ie., for a 15 year mortgage versus a 30 year mortgage) will demonstrate that greater amounts of each payment are allocated to amortization in the shorter duration mortgage as the mortgage needs to be killed more quickly.  Comparing amortization schedules can also help you to understand the interest rate risks involved in Adjustable Rate Mortgages (ARMs).
  • Interest-only mortgage loans are, by their very nature, loans that are non-amortizing for a certain period.  An interest-only loan has a non-amortizing period (or could even have a negative amortizing period where the mortgage balance increases) for the first few years or even first half of the loan term.  This period is then followed by an amortizing loan in which the borrower amortizes the principal more quickly.   Lenders, in principle, like making interest-only mortgages because they increase the principal mortgage balance remains outstanding at its highest principal value for a long period of time, enabling the bank to maximize the mortgage interest that it is receiving.  However, homeowners, should be seeking to amortize or gradually kill off a mortgage and gain equity in their homes.  Many borrowers in the 2000’s got into a lot of trouble by using interest-only mortgages to borrow amounts on homes that they would not have been able to afford if they were required to take out an amortizing mortgage and have part of their monthly payment allocated to killing the principal at the time of their home purchases.  

These are just a few facts to help you understand what amortizing is and what mortgage professionals mean when they use the term. Hopefully this will help you be more informed during your home buying experience so you can make a well-educated decision about the terms of your mortgage loan.

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