by Stephanie Berenbaum – October 21, 2010
Spending Money to Save Money
Even if you’re not exactly an expert on the housing market, you’ve probably heard some commotion over the past few days about mortgage rates falling to all time lows. According to Bankrate.com, the average 30 year fixed is now at 4.42%, while the average 15 year fixed is at a record low 3.82 % – WOW! It’s enough to make any homeowner want to jump on the refi bandwagon – as I myself recently did…
While refinancing your mortgage can certainly save you A LOT of money in the long run, not everyone realizes that they may have to pay significant upfront costs to secure the deal. These costs are often worth it, but they must be taken into consideration when evaluating the decision to refinance. Like so many things in life, sometimes you have to pay to play…
Good Faith Estimate
The concept of having to ‘spend money to save money’ is an important one to keep in mind when thinking about refinancing. When we recently refinanced our house, we paid the several thousand dollar ‘closing cost’ bill, knowing that it was normal to have high upfront costs, but not fully understanding in detail where that money was actually going. So the other day, I re-examined my paperwork (albeit after the fact) – sounds like a pretty rocking Saturday night, right?
The good news was that I found most of the answers to my questions in just a few pages called the Good Faith Estimate (GFE). The GFE is actually required to be sent to you within 3 days of applying for a loan. This is literally an estimated break down (and keep in mind it is only that: an estimate) of what your closing costs will be, so you – the consumer – can understand approximately what it will cost and where your money is going.
Closing costs differ according to region and type of property, but as a general rule of thumb, it seems to cost between 3-5% of the loan amount to refinance – typically thousands of dollars!
Without boring you to tears, the basic deal is that these fees are broken down into two main groups on the GFE: Origination Charges and the vague sounding All Other Settlement Charges.
The Origination charge is defined as: ‘the charge for getting the loan to you’. Ok… Also included here are the points (if any) being paid - basically points refer to higher upfront fees that are sometimes paid in exchange for a lower interest rate. All Other Settlement Charges includes everything but the kitchen sink, such as: appraisal fees, credit report fee, tax service fee (still unsure what this is), Flood Certification, title services, homeowners insurance…and much more! But you get the idea – there are a lot of upfront fees to pay, equaling a lot of dollars!
Financing Your Closing Costs
As I mentioned, between the origination charges and the all other settlement charges it was thousands of dollars that we needed to have on hand to pay for our refi. So, you may ask – do you really need to have it upfront? From a Fab & Fru perspective, I would say YES! Though you can technically finance the refinance charges by spreading it out and including them in mortgage payments. This may increase your monthly payments, and of course means you are being charged interest that money – which serves to eat away at the savings you are trying to achieve through your refi, right?| Print
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