How Much Does It Cost To Refinance a Mortgage?
Refinancing a mortgage loan can be a very smart move. It can decrease your monthly payments, shorten your payoff term, or consolidate debt. But, how much does it cost to refinance a mortgage, and is that option right for you? You will find the answers to these questions below.
Reasons to Refinance
Before we jump into the exact closing costs of refinancing, let’s go over the benefits of this financial maneuver:
Lower Your Interest Rate
When pondering whether to get a mortgage loan, the interest rate usually ends up being the deciding factor. The interest rate you end up getting will always be affected by the state of the market and your credit score. However, both things change over time; within a few years, you could refinance your home and get a much better mortgage rate. This would allow you to reduce the amount of money you have to pay back.
Shorten or Lengthen Your Term
One of the most common reasons people decide to change their loan term is because their income increased after they took out their original mortgage. Back then, they might have settled for a 30-year repayment period so as to not get overwhelmed by monthly payments. Still, with more money going into their budget, a borrower might wish to refinance their home and become debt-free as soon as possible. In addition to that, a shorter loan term also means paying less interest overall.
If, however, you find yourself in a tight spot and would benefit from having more time to settle the debt, you can lengthen your term and take some pressure off.
Cash-Out Refinancing and Debt Consolidation
With enough home equity, it’s worth considering cash-out refinancing. This means obtaining a new, bigger loan than your previous one, and pocketing the difference. You can use the extra funds for consolidating some outstanding debts, fully equipping your home, or covering unexpected expenses. Although this way of refinancing a mortgage sounds almost too good to be true, bear in mind that it translates to higher interest. So do the cost-benefit analysis and make sure this is indeed the right choice before opting for it.
Turn an Adjustable-Rate Mortgage Into a Fixed-Rate Mortgage
Some first-time homebuyers tend to get an adjustable-rate mortgage because it offers low interest rates at the beginning of the loan term. The problem is that the interest rate keeps fluctuating during the life of the loan and, although that can sometimes be beneficial to the borrower, more often it becomes rather costly. People frequently refinance a mortgage from an adjustable to a fixed rate once they attain financial security. After all, predictability is certainly something to strive towards with such huge sums of money.
However, despite the fact that the interest rate remains unchanged throughout the loan term, you shouldn’t forget that the amount of interest you’ll pay with a fixed-rate mortgage is still determined by the length of said term. Another important detail you should be aware of is that fixed-rate loans are harder to qualify for.
How Much Does It Cost To Refinance a Mortgage?
Usually, you can expect to pay between 2% and 6% of your original loan’s principal in closing costs. For instance, to refinance a $400,000 mortgage, you’d need to set aside between $8,000 and $24,000.
As you can see, these figures are far from negligible, which is why refinancing shouldn’t be taken lightly. But worry not; we’re here to help you understand exactly where your hard-earned cash would go. We’ve prepared a thorough breakdown of the most common fees included in refinance closing costs:
- The application fee: This is required with most loan types and covers the costs of the loan approval process. It’s paid up front and, depending on your chosen lender, can range from $75 to $500.
- The appraisal fee: All mortgage refinance companies will ask you to submit a home appraisal as part of your loan application. Based on the value of the property serving as collateral for the loan, lenders determine how much money to offer you. A typical appraisal costs around $400, but a detailed appraiser report can run you over $1,000.
- The origination fee: This refinance fee is similar to the application fee in that even the best mortgage lenders charge it for processing. The difference is that, in this case, you’re usually paying to have an account established with the company providing the funds. It usually ranges between 0.5% and 1.5% of your loan principal.
- The recording fee: You’ll have to pay a government agency to legally record your deed, mortgage, and the documents associated with your home loan. According to the latest mortgage statistics, the national average for recording fees is $125.
- The credit report fee: Applying for a home refinance means your lender will want to check your credit by requesting a credit report from the credit bureaus. Credit report fees range from $30 to $50 per report; fortunately, some lenders cover this cost themselves.
- Title search and insurance fee: In a title search, a title company or attorney examines public records and legal documents regarding the history of a piece of real estate to make sure the property title doesn’t have any defects. Title insurance essentially protects you from these defects. You can expect this fee to add between $400 and $900 to your overall refinance costs.
- The closing fee: Closing costs are levied when you obtain your loan. To cover them, you’ll need to set aside between $500 and $1,000.
You’ve probably realized that the closing costs for refinancing are similar to those you’ve already seen when you took out your first mortgage loan. Other fees you commonly won’t find included in lists such as this one are property taxes, mortgage insurance, and homeowner’s insurance. Keep them in mind, as well.
Although it may sound like an easy fix for many problems, mortgage refinancing does have certain disadvantages. If you choose the cash-out option, you will reduce your home equity. Additionally, the comfort of stability that homeowners achieve by transferring to a fixed-rate mortgage deprives them of the possibility of taking advantage of potentially lower interest rates that would be accessible with the adjustable-rate mortgage.
Not to mention that, while reducing the loan term by refinancing might lower your total interest significantly, it will also make way for higher monthly installments. Lastly, the process of refinancing itself is quite expensive; read more in our “How Much Does It Cost to Refinance a Mortgage” guide.
Lenders determine whether to approve your refinance application in the same manner they would if you were applying for any other type of loan. This means that they look at your credit reports, assets, credit history, and your debt-to-income ratio. If they come across something they dislike, such as late payments or a lack of financial experience, lenders might not take you on as a client.
You can refinance without paying any upfront closing costs, but you should know that doesn’t mean that those costs are simply forgiven. On the contrary, they are, in a way, moved to your principal or exchanged for a higher interest rate. Therefore, even though it might look like you’re getting a great deal, keep in mind that, if things sound too good to be true, they probably are. You should know that getting a no-closing-cost-refinance deal on your mortgage just means paying for it a bit later.
Refinancing to lower your interest rate by 1% is often worth it. It may not seem like it, but 1% is actually a solid rate drop that could help you save a significant amount of money over time. Of course, it goes without saying that, before you commit to a loan offer, you should always shop around for the best possible terms and the lowest refinance fees.
Many factors determine the closing costs of your refinance loan. The primary candidates are your credit score, loan term, home equity amount, the size and type of your new mortgage, as well as the state and country where you live. Refinancing an average mortgage loan would set you back approximately $5,000. If you’re curious to know the specific fees that comprise the closing costs of refinancing, you can read our “How Much Does It Cost to Refinance a Mortgage” guide.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
More from blog
Your email address will not be published.