How much does it cost to refinance a mortgage?

How much does refinancing a mortgage cost?

The closing costs for a mortgage refinance vary according to the size of your loan and state and county where you live. The average refinance closing costs increased in 2021 to $2,375 (excluding taxes), according to ClosingCorp.

Generally, you can expect to pay 2 percent to 5 percent of the loan principal amount in closing costs. For a $200,000 mortgage refinance, for example, your closing costs could run $4,000 to $10,000.

Refinancing a mortgage can be an effective way for homeowners to reduce their monthly payments, obtain a better interest rate, or access their home equity. However, it’s important to understand that refinancing comes with various costs. In this article, we will explore the different expenses involved in refinancing a mortgage to help you estimate how much it may cost you.

1. Closing Costs:

When refinancing a mortgage, borrowers encounter closing costs, which are similar to those incurred during the initial mortgage process. These costs typically range from 2% to 6% of the total loan amount. Here are common closing costs associated with refinancing:

a. Application Fee: Lenders may charge an application fee to cover the administrative costs of processing your loan application.

b. Origination Fee: This fee covers the lender’s services in creating and processing the new loan. It is usually a percentage of the loan amount.

c. Appraisal Fee: An appraisal fee is paid to a professional appraiser to determine the current market value of your home.

d. Title Search and Title Insurance: These costs ensure that there are no outstanding liens or issues with the property’s ownership. The title search confirms the legal status, and title insurance protects the lender (and optionally, the homeowner) against any future claims.

e. Attorney Fees: In some states, an attorney may be required to oversee the closing process, review documents, and provide legal advice.

f. Credit Report Fee: Lenders typically charge a fee to obtain and review your credit report during the refinancing process.

2. Prepaid Expenses:

When refinancing, you may also encounter prepaid expenses, which are costs associated with setting up the new loan or covering ongoing expenses. Common prepaid expenses include:

a. Property Taxes: You may be required to prepay a portion of your property taxes to ensure they are up to date at the time of closing.

b. Homeowners Insurance: Similarly, you may need to prepay a portion of your homeowners insurance premium to maintain coverage.

c. Interest: Depending on the closing date, you may need to pay interest from the date of closing until the end of the month.

3. Break-Even Point:

To assess whether refinancing is financially beneficial, it’s crucial to calculate the break-even point. This is the point at which the monthly savings from refinancing outweigh the costs incurred. Divide the total closing costs by the monthly savings to determine how many months it will take to recoup the expenses.

4. Other Factors to Consider:

a. Loan Term: Extending the loan term during refinancing may reduce monthly payments but could increase the total interest paid over the life of the loan.

b. Negotiation: Some closing costs may be negotiable, so it’s worth discussing options with the lender to potentially reduce expenses.

c. Cash-Out Refinancing: If you choose to cash out a portion of your home equity, additional fees and costs may apply.

Here’s a breakdown of the fees commonly included in refinancing closing costs:

How to lower the cost to refinance

1. Boost your credit score
2. Compare mortgage offers and rates
3. Negotiate closing costs
4. Ask for fee waivers
5. Assess whether to buy mortgage points
6. Go with your original title insurer
7. Consider a no-closing cost refinance

1. Boost your credit score

Just as you aimed for a certain credit score when you applied for your first mortgage, you’ll need to meet credit score minimums to refinance, too. The better your credit, the lower the interest rate you’ll qualify for when refinancing. Among several strategies, you can boost your credit by paying down or paying off debt.

2. Compare mortgage offers and rates

To get the best mortgage refinance rate, compare offers from several banks and other mortgage refinance lenders. Make sure to look at APR to get a fuller sense of the loan’s cost. Consider working with a mortgage broker to get a range of offers. Always be sure to get a quote from your existing lender, too, in case it offers a lower-cost refi or other repeat customer benefits.

3. Negotiate closing costs

As with your first mortgage, look closely at the loan estimate from your lender to see the breakdown of costs. You might save yourself some money by negotiating closing costs, especially if you’ve shopped around and have more than one refinance offer in hand. You can use other quotes to check for unusually high fees and try to talk them down.

4. Ask for fee waivers

In the same vein, ask your bank or lender if it will waive or lower the application fee or credit check fee. You can also see if it will let you forgo a new home appraisal or property survey if you’ve recently had one done. Your lender might be willing to work with you, particularly if you’re an existing customer.

5. Assess whether to buy mortgage points

If you want to lower your closing costs, consider whether buying mortgage or discount points is worth it. While buying points lowers your interest rate, it’s usually best only when you expect to own the home for a long time and don’t plan to refinance again — even to pay for a major renovation later on. You can use Bankrate’s mortgage refinance calculator to help determine whether it’s worthwhile to buy points when refinancing.

6. Go with your original title insurer

In many states, title rates are regulated, but you can try to cut down your title services costs by asking your current title insurance company how much it would charge to reissue the policy for your refinanced loan. Doing this might cost less than starting over with a new company or policy. In addition, if you didn’t obtain an owner’s policy the first time around, consider getting one now.

7. Consider a no-closing cost refinance

If you’re low on cash, consider a no-closing-cost refinance. The name is a bit deceiving, as this isn’t free; however, it means you won’t have to pay fees at closing. Instead, the lender will either raise your interest rate or fold the closing costs into the new loan. Usually, it’s not worth it to refinance if you can’t afford the closing costs.

Conclusion:

Refinancing a mortgage can offer financial benefits, but it’s essential to consider the associated costs. Closing costs, prepaid expenses, and ongoing considerations like the break-even point should all be carefully evaluated. By understanding the expenses involved, homeowners can make informed decisions and determine if refinancing is a viable option for their specific financial situation. It’s advisable to consult with mortgage professionals to obtain accurate cost estimates and explore the best refinancing options available.