Should you or should you not refinance your Phoenix Home Loan? Considering total costs to refinance is one key when making this decision. In fact, 3 cost categories factor into most refinances.
Costs to Consider When Refinancing Your Home Loan
Refinancing a home loan involves 3 main cost categories. They are:
- Lender Fees
- Appraisal Fee
- Title Fees
- Escrows or Impounds
What is an impound/escrow account? Your current home loan likely has one. Property tax and insurance funds from your normal monthly mortgage payments accumulate inside your impound/escrow account. Once Property Taxes are due, the County is paid directly from your escrow account. The same is true for your homeowner’s insurance.
What Happens to An Escrow Account When You Refi?
In most cases, refinancing your Arizona mortgage closes the escrow account tied to it. However, the money in your old escrow account was yours. As a result, you receive a refund a few weeks (typically 2 to 4 weeks) after closing your new refinance.
Great right? More money! As economics teachers preach, “there is no such thing as a free lunch”. The refunded escrow money must be replaced. If not replaced, your new escrow account is short. When the tax or insurance man ask for money your escrow account would be empty.
For example, assume your escrow account balance is $1500 the day your new refinance loan funded. The $1500 came from your previous partial tax and insurance payments included in each monthly mortgage payment you made.
However, what happens with your new escrow account? After-all, tax and insurance bills are due the same as before refinancing. Thus, you are charged for “new” escrow account funds on your refinance. Often called “pre-paids” these funds are placed into a new escrow account putting you back on track for property tax and insurance payments going forward.
Escrow Accounts Are Re-Filled After A Refi
Charges to replace funds from your old escrow account are within your new refinance. Section F and G on your Loan Estimate of page “2 of 3” outline what is charged on your refinance. These charge roughly equal the balance in your old escrow account the day your refinance funds. However, these two amounts are not equal.
Ultimately, new tax and insurance charges essentially “wash” with the escrow account refund you receive after refinancing. Therefore, new pre-paid tax and insurance charges on your refinance are not hard costs.
When calculating “break even” points for your refinance, do not include the pre-paid taxes and insurance. Your break even point equals the time it takes to recoup refinance costs with the savings from your refinance. For example, a refi with $150/month savings and true costs of $2,100 the break even point is 14 months ($2100/$150 = 14 months).
By Jeremy House