Refinancing your mortgage can help you save money, lower your interest rate, or shorten your loan term. But it also comes with some costs that you need to understand before you sign the papers. Here are some tips on how to explain refinancing costs to your clients in a clear and simple way.
The origination fee is what the lender charges you for processing and underwriting your new loan. It usually ranges from 0.5% to 1.5% of the loan amount, depending on the lender and the loan type. You can negotiate this fee with your lender or shop around for a better deal. You should tell your clients how much the origination fee is, how it affects their monthly payments, and how long it will take them to break even.
There are two kinds of costs. Recurring and non-recurring closing costs. Recurring costs are things like interest due, property taxes, home owner insurance etc. Items that you as the property owner are responsible for anyway. Non-recurring items are title/escrow fees, lender fees, appraisals and so on. These are transactional costs. Each clients situation is unique and depending on what the best option for them might be the discussion can vary. Some refinances are truly no cost to the borrower if the lender gives a credit to pick up the non-recurring costs. Or if the client decides to pay the costs plus points that's where the out of pocket costs can get expensive.
While discussing the origination fee, it's essential to emphasize the significance of borrowers being fully aware of this cost. Many borrowers may focus solely on interest rates when considering a loan, but the origination fee can significantly impact the overall cost of borrowing.
Refinance costs varies and dwindles down to rate and terms negotiated with your preferred Loan Brokerage or Direct Lender. See following fees below: 1?? Appraisal Fee: This covers the assessment of your home's value, a crucial step in determining your refinancing options. 2?? Origination Fee: This is for processing the new loan, typically a percentage of the loan amount. Sometimes Negotiable. 3?? Credit Report Fee: Lenders check your credit score, and this fee covers that important assessment. 4?? Title Insurance Fees: These ensure a smooth transfer of property rights during the refinance process. 5?? Closing Costs: Escrow fee, Title fee, notaries, and other services to finalize the loan. It's all about making informed financial decisions!
The appraisal fee is what the lender charges you for hiring a professional appraiser to evaluate the current market value of your property. This is important because the lender needs to verify that you have enough equity in your home to qualify for the new loan. The appraisal fee usually costs between $300 and $500, depending on the size and location of your property. You should tell your clients why the appraisal is necessary, how it works, and what factors influence the appraised value.
Indeed, the appraisal fee serves a vital role in the loan process. It's not just an added cost, it's a safeguard for both lenders and borrowers. By ensuring our property's value aligns with loan requirements, it helps prevent overborrowing and protects the investment. Clients should view it as an investment in their financial security, as it can uncover crucial insights into their property's worth.
The closing costs are the miscellaneous fees and expenses that you have to pay at the end of the refinancing process. They include things like title insurance, recording fees, attorney fees, escrow fees, and prepaid taxes and insurance. The closing costs typically amount to 2% to 5% of the loan amount, depending on the lender and the state. You should tell your clients what the closing costs are, how they are calculated, and how they can reduce them by rolling them into the loan balance or asking the lender to pay them in exchange for a higher interest rate.
Closing costs, in my view, are like the 'hidden costs' of refinancing. While they may appear as miscellaneous expenses, they hold the key to optimizing our financial strategy. Understanding how to manage and possibly even reduce these costs by negotiating with the lender can significantly impact the overall value of our refinancing journey. It's a valuable perspective to keep in mind when navigating this process.
I understand it is an option to roll into the loan but why would you pay 6-8% on the fees being paid to the lender and admin cost of you borrowing money from them when you are already paying 6-8% on 100's of thousands of dollars. We should be doing the right thing for people and convincing them to roll the closing cost into the loan seems contradicting. A $7500 closing cost rolled into a 30 yr fixed loan of 6% would cost the client $8600 in interest....
I help them understand that refinancing is actually a new mortgage that they are closing on. Sometimes it is worth doing to gain a better interest rate but other times it is a way to borrow against the equity built up in your home. I also discuss market conditions and the risk involved if they take cash out of their home's current value.
There’s a cost to doing business: For a person that is refinancing for a better payment, they can probably afford to pay the closing cost upfront. Per person that is refinancing to materialize their equity in order to accomplish a goal is going to want to hold onto that cash or just not have it at all. As for the closing costs, in particular, if there were no closing costs… Then it would not make sense for the lenders to offer a refinance option. So refinancing wouldn’t even be a thing without people being able to profit from making it available to their clients.
The prepayment penalty is what your current lender may charge you for paying off your existing loan before its maturity date. This is a way for the lender to recoup some of the interest income that they would lose if you refinance. The prepayment penalty varies depending on the lender and the loan terms, but it can be as high as 6 months of interest or a percentage of the remaining loan balance. You should tell your clients if they have a prepayment penalty clause in their current loan contract, how much it is, and how it affects their refinancing decision.
Many states have abolished pre-payment penalties (PPP) for primary residences. Also, The Dodd-Frank Act limits prepayment penalties. A PPP can only be charged during the first 3 years of the loan and are capped at 2% of the loan balance for the first 2 years and 1% of the loan balance for the 3rd year. 2nd homes and Investment properties have different requirements.
En cas de refinancement, la prise en compte de tous les frais liés à la mise en place de l’opération est faite. Les IRA doivent être intégrés dans le calcul de ces frais au même titre que les frais de dossier bancaire et/ou de courtage. En sachant que la pénalité pour remboursement anticipé est de 6 mois d’intérêt plafonnée à 3% du capital restant d?.
The break-even point is the time it takes for you to recover the costs of refinancing through the savings in your monthly payments. This is a crucial factor to consider when deciding whether refinancing is worth it or not. To calculate the break-even point, you need to divide the total cost of refinancing by the monthly savings. For example, if refinancing costs you $4,000 and saves you $200 per month, your break-even point is 20 months. You should tell your clients how to find their break-even point, how it depends on their loan term and interest rate, and how long they plan to stay in their home.
In and of itself it's a black and white analysis and usually recommend no more than a 5yr breakeven, however there can be external options to weigh in... what the cashflow savings may be worth, are you able to pay higher rate debt off or fund an investment with a higher return than what your mortgage is. For these reasons you must analyze the entire financial picture of the client and how the mortgage integrates with borrowers overall goals and objectives.
Discovering our break-even point is the smart way to evaluate refinancing. Calculate total costs vs. monthly savings, considering our long-term plans, interest rates, and loan terms. Tailor our decision to match our financial goals.
It is VERY important to find out if a refinance makes sense by knowing that breakeven point. When rates were very low, I had a client call me 3 times to refinance. I ran her numbers each time and explained to her that despite this rate being lower than her current rate, she was so far into the amortization of the loan (only had 5 years left to pay it off) that in the end, she would pay MORE interest than she would continuing to pay her current loan. Why? because interest is front-loaded over your amortization period, meaning you pay more interest in the begining than you do when you are getting closer to payoff.
A lot of loan officers sell the savings over 30 years to make a refinance look better than it is. Don't fall for this gimmick. The odds of keeping the same mortgage for 30 years are less than 1% due to selling or refinancing. Focus on a realistic time frame for the actual cost of a loan and not more than 7-10 years.
Cost is only a concern in the absence of Value. Just like rate should not be the topic of concern either if you have brought value to the overcoming the obstacles to achieving their true financial goals. Getting out of DEBT (all of it) saving more for college, retirement, their future home. I would encourage all to stop selling on temporary fulfillment and help the client create a bigger vision for what they are trying to do.
In 1981 with 21% interest rates, one of my neighbours was really squeezed. When interest rates dropped to 14 3/4% he was ready to re-finance. I went to the Bank with him and met with the Manager who wanted a 3 mo. penalty to break his existing Mortgage. I told him that the Bank was legally entitled to it--and he would have to pay it---but that if he did, he would move to another Bank. The Manager cut the pre-payment penalty in half to keep the client. The message to your client is you can negotitate penalties!