How Refinance Charges Are Calculated

You've decided to refinance your home's mortgage loan, and you want to know how refinance charges are calculated. But your lender quotes you an interest rate and fees that seem awfully high. What's the problem?

It can actually be one of many things. That's because mortgage companies consider a wide variety of factors when determining how much you'll pay in interest rates and fees when you refinance your mortgage loan.

The most important factor in determining your interest rate -- which will, in turn, determine how much you'll pay on your new mortgage loan each month -- are your three-digit credit scores. You have three of these, each calculated by the country's three credit bureaus, Experian, Equifax and TransUnion. These scores tell lenders whether you've been a mature or irresponsible borrower in the past. If you have a history of paying your bills late, your credit score will fall. If you've declared bankruptcy in the past, your score will plummet. If you always pay your bills on time, and if you don't have a significant amount of revolving debt, your credit score will be high. Lenders charge the lowest interest rates to borrowers whose scores are 720 or higher.

Fees are more complicated. Many lenders charge standard refinancing fees for every customer, usually ranging from 1 percent to 4 percent of the value of the mortgage loan they are refinancing. Others, though, will charge lower fees to borrowers with high credit scores and a stable, steady source of income. You might also qualify for lower fees if you refinance your mortgage loan with the same mortgage lender who originated your first mortgage loan.

The best way to find the lowest fees, though, is to shop around with several lenders. Thanks to the Internet, you can do this quickly. You'll find that fees vary by a lot, with some lenders even boasting no-cost mortgage refinancing.

The interest rates? That you'll have little control over. If your credit isn't good, expect to pay higher rates. If your credit is good, relax. You can expect a solid interest rate on your refinance.

SOURCES:

Federal Reserve: A Consumer's Guide to Refinancing

HUD: Refinancing Your Home