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Military Finances 201: The True Cost of Refinancing Your Mortgage

Veterans Benefits Managing Your Finances

Most military officers at one point or another become  a proud homeowner. If you are, it’s likely you have a mortgage. And if you’ve been a homeowner for a while, you may have heard about and even considered refinancing your mortgage. The average amount homeowners are borrowing has climbed in recent years, jumping from an average of $205,940 in 2007 to $260,390 in 2017.1 With more and more money on the line, it’s easy to see why people may want to jump at any opportunity to lower their interest rates. But before diving in, there are important things to consider before refinancing your mortgage.

What Does Refinancing Your Mortgage Mean?

Refinancing your mortgage refers to obtaining a new mortgage to replace your original one. The new mortgage is used to pay off the original amount owed, and the homeowner is now responsible for paying off this one instead. This is typically done to allow the homeowner to obtain better interest terms and rates.

6 Common Costs Associated With Refinancing a Mortgage

Below are six of the common cots homeowners should be prepared to account for when deciding whether or not refinancing a mortgage is right for them.

Cost #1: Application & Underwriter Fees

Some lenders will require you to pay an application fee to help cover the associated costs of beginning the loan process. This fee will vary by lender, and it is sometimes returned to the borrower once the loan process is completed. It’s unlikely, however, that the fee will be returned if the loan is denied. This fee may also incorporate a loan underwriter, as the lender needs to pay someone to assess your ability to pay back this new loan.

Cost #2: Appraisal Fees

Sometimes lenders will require a new appraisal of your home to help justify the amount of the new mortgage. While you may have had your home appraised when you applied for the original mortgage, it’s likely that the value of your home has changed since then. The property appraisal cost can vary, but the average lands at about $480 for a typical, single-family home.2

With the VA's streamline process you can refinance without an appraisal so you can save on this. The same is true for a FHA mortgage.

Cost #3: Title Insurance

Title insurance is required by any mortgage lender , as it helps dissipate any ownership disputes on the property during the term of the loan. While you may have purchased a policy when obtaining your original mortgage, a new policy is required when refinancing your mortgage. 

Cost #4: Credit Check

Of course, lenders are going to want to check your credit score before deciding whether or not to lend you the money. But since credit checks are not free to run, lenders will likely charge you a fee to check your credit. That fee will vary greatly depending on where the lender goes to obtain their credit check. Like above, if you're working with a VA Streamline Refinance, you can skip this one as well.

Cost #5: Taxes

Depending on where you live, some local or state governments require you to pay taxes relevant to refinancing a mortgage. These could include mortgage tax, realty transfer tax, mortgage recording fees and more. As you work to account for all the costs associated with refinancing your mortgage, make sure you check in with your local tax laws and codes to see what taxes you may be required to pay at closing.

Cost #6: Closing Costs

Closing costs will vary greatly depending on each homeowner's unique circumstances. For example, taxes are typically accounted for in the closing costs - which vary depending on your location. In 2018, the average closing cost (taxes included) was around $5,779.3 These closing costs may incorporate some of the other fees mentioned above, dependent on how and when your lender prefers to charge you for these services. If you decide to use a mortgage broker to negotiate new financing terms between you and the lender, the closing costs may also incorporate a yield-spread premium, which is typically between 0.25 and 1 percent of your loan.4   With a VA loan your closing costs will include a 0.5% funding fee, unless you are disabled and not required to pay the funding fee.

Is Refinancing Your Mortgage Worth It?

Deciding to go for a lower interest rate on your mortgage may initially sound like a no brainer, but it’s important to take into account all of the costs associated with refinancing first. If you’re spending, for example, $5,500 on costs to refinance your home, how long will the savings in monthly payments take to make up the difference? This can be an issue for military members as we move so often. But, if you’re planning on living in your home for the next 10, 20, 30+ years or turning it into a rental, it could be more than enough time.

It’s hard to resist the temptation of obtaining a lower interest rate on your mortgage, especially when that could mean saving $100, $200 or more each month in mortgage payments. But before you start the paperwork, be sure to take into account all of the costs you will be expected to pay towards refinancing your mortgage.

  1. https://www.consumerfinance.gov/data-research/hmda/explore#!/as_of_year=2017&property_type=1&action_taken=1&loan_purpose=1&select=action_taken_name,avg_loan_amount_000s&section=summary
  2. https://www.valuepenguin.com/mortgages/average-cost-of-refinance
  3. https://blog.alta.org/2019/06/closingcorp-reports-2018-average-closing-costs.html
  4. https://www.lendingtree.com/home/refinance/mortgage-refinance-closing-costs/

If you enjoyed this article, you might like the following blog posts:

4 Common Mistakes Made by First Time Homebuyers


Military Finances 101: 8 Real Estate Books to Read Before Buying Your First Home


Inherit the Family Home? Tax Consequences for Military Officers


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