Deciding to refinance a mortgage could be a good one. In some situations, doing so helps homeowners stay in their homes longer, especially if they need a lower mortgage payment. Yet, a cost is associated with refinancing a home loan, which is a significant part of the decision-making process.
The Economics of Mortgage Refinancing
Refinancing a home loan means taking out a new loan – with new terms and conditions – and using the funds to pay off the existing loan. It may help lower your monthly payment or provide access to cash. However, you can expect to pay between 2 and 5 percent of the loan principal – the amount of money you borrowed, in closing costs.
Consider that, then. If you obtain just a $250,000 new mortgage, you may pay between $5,000 and $12,500 in fees to obtain the new loan. If your savings potential is not more than that, you are losing money by refinancing.
Refinancing Costs
The cost to refinance a mortgage ranges widely based on the lender used and the type of loan. However, many fees paid during this process are similar to those paid when purchasing a home and taking out your initial loan. Here's a rundown of some of the most common costs you can expect to pay:
- Application fee: Typically ranging from $75 to $300, you pay this when applying for the loan.
- Loan origination fee: Typically, this fee, called an underwriting fee, ranges from 0.5% up to 1.5% of the borrowed amount and covers fees for the underwriters to perform their work.
- Points: You can pay points to lower your interest rate. Typically, one point is worth 1% of the borrowed amount.
- Home appraisal fee: Your home will need a formal appraisal, which costs between $300 and $450, depending on your area, which you pay to the appraisal company.
- Inspection fees: Depending on the type of loan required, a formal home inspection may be required to ensure it meets government standards. It will range from $150 up to $300.
- Attorney Review and Closing Fee: In some cases, an attorney handles a great deal of the contract work and the closing documentation. This fee is likely to be $500 or more.
- Title search and insurance fees: You pay title insurance when obtaining assurance that no one else has a claim to the property. Expect to pay $700 to $900 for these services.
- Survey costs: A formal survey of the property helps define the actual formal land positioning. This fee is usually around $150 to $400, depending on location and the property size.
- Prepayment penalties: Look into the loan you currently have. Some types of loans have prepayment penalties. These are typical if you just recently refinanced the loan. They may be around 2% of the remaining amount you owe on the loan.
- Miscellaneous fees: Your closing documents will list all costs you must pay, but expect fees like tax service fees, credit report fees, and other administrative-related fees to apply.
Ways to Pay for Refinancing
The most straightforward method to cover closing costs when refinancing your home loan is to pay the fees directly to the lender at closing. If you don't have the necessary funds immediately, you can refinance by including the costs in the loan. But remember, the higher loan balance will increase your monthly payment.
Strategies for Reducing Costs
You can reduce closing costs in some ways.
- Make sure you ask your lender to reduce the costs. Negotiating lower rates is an option available to many borrowers, and it could help you to save money.
- Get quotes from several lenders to compare. Not all will charge the same rate of closing fees, and some may offer lower costs just to get you to refinance.
- Always look for the lowest interest rate possible. Even though this does not directly lower your closing costs and the cost to refinance a loan, it does keep your overall costs lower.
- Use your original title insurer. That means they will not have to do all of the work over again to insure your home's title, and that could lower your costs.
- Consider a no-closing cost refinance available from some lenders, where you roll closing costs into the loan.
Takeaways
Refinancing a mortgage is often beneficial if the cost of closing on the loan is less than the benefit you plan to achieve through a lower interest rate and monthly payments. Ensure you understand all costs related to refinancing to ensure you make the best decision for your specific needs.