By sbup Staff
When it comes to refinancing your mortgage these days, being able to lock in a lower interest rate is the good news. The bad news? Finding out how much it will cost you. And with tighter lending standards in place and volatile interest rates, that bill keeps creeping up ever higher.
Deciding to refinance depends on whether you stay in your home long enough for your interest savings to cover the upfront refinancing costs -- the lower the cost, the less time it takes to break even. So the fact that government-backed mortgage lenders Freddie Mac (Stock quote: FRE) and Fannie Mae (Stock quote: FNM) are charging a premium on higher-risk loans is a concern, especially since the extra fees are getting passed along to homeowners looking to take advantage of today's lower rates.
"Freddie and Fannie are charging an adverse market fee depending on credit scores," says Marc Savitt, president of the National Association of Mortgage Brokers. "Any score below 740 will get hit with extra fees, and anything below 700 is now considered a substantial risk."
The mortgage giants have long included a fee to help cover losses on defaulting mortgages, but the new fees are higher. Depending on a combination of your credit score and the ratio of the amount of your loan to the value of your home, your upfront costs might increase by 0.25, 0.5 or 0.75 of a percentage point of your new loan. (On a $200,000 loan, that translates into an extra $500, $1,000 or $1,500 in closing costs.)
So even though residents of Massachusetts might qualify for a 30-year fixed-rate mortgage from Bank of America (Stock quote: BAC) with an APR of 5.55%, your closing costs will be $1,000 higher if your credit score is between 680 and 700 and your loan 75% to 80% of the value of your home.
Even lenders themselves have contributed to the rise in refinancing costs by requiring that borrowers pay more points to get the best rates. In the first seven weeks of 2009, the points required to get the best rates averaged from 0.6 to 0.8 according to Freddie Mac's Primary Mortgage Market Survey. The same period last year saw averages of 0.4 and 0.5 points on interest rates almost half a percentage point higher than they are now. (One point represents 1% of your loan's value and typically lowers the interest rate on your loan by 0.25 percentage points.)
So even though interest rates on mortgages are at historically low levels, it's still important to make sure refinancing make sense in your situation. For help on that, check out manybanking.com's refinancing calculator.