August 31st, 2019 4:45 PM by Jackie A. Graves, President
There are several costs to know
before refinancing a home loan.
REFINANCING A MORTGAGE could result in a lower
monthly payment or a reduction in your interest rate. That could save you
money, but is the cost to refinance your mortgage worth it? Here's what you
need to know.
Refinancing a Mortgage Cost?
Refinancing a mortgage
means getting a new loan to replace your mortgage. The fees you may be charged
for a refinance loan are similar to original
mortgage costs. On average, homeowners can expect to pay 2% to 3% of the
loan amount to refinance a mortgage. Refinancing a $300,000 home loan, for
example, may cost $6,000 to $9,000.
These are costs that
would be due at or before closing. Inspection and appraisal fees, for instance,
you'd pay during underwriting for a refinance loan.
type of refinance loan will require closing costs, including conventional
mortgages, USDA loans, VA loans, adjustable-rate mortgages and FHA loans. The
amount you pay can depend on the amount you're refinancing, what type of loan
you currently have and the type of loan you're refinancing into, what your
lender charges for closing fees and where you live.
"Not all of these fees are created equal, so you should
request a breakdown when shopping around," says Brian Walsh, manager of
financial planning at lender SoFi. "Lenders might be willing to waive the
application fee or lower the origination fee. Even if a specific lender is not
willing to lower their fees, having a detailed breakdown from each lender will
help you make an educated and informed decision."
Take note, these costs
don't include what you might pay for private mortgage insurance when
refinancing. Private mortgage insurance typically applies to conventional home
loans when you put less than 20% down, but can be removed when you reach 20%
Refinance a Mortgage
The most important step
in the refinancing process isn't necessarily getting a loan; it's determining
whether refinancing makes sense in the first place. That involves looking at
your short- and long-term financial goals, current mortgage terms, overall
market conditions and reasons for refinancing, says John Dustman, senior vice
president of consumer direct lending at Axos Bank.
For instance, you may be
considering a refinance to try to save money on homeownership costs or to
convert an adjustable-rate mortgage to a fixed-rate loan. Or you may be
weighing a cash-out refinance to tap equity for repair or renovation projects. Refinancing
may be necessary after divorce if your former spouse wants their name removed
from the original mortgage.
Conduct a break-even analysis to compare the costs of
refinancing against the potential monthly interest savings as a good starting
point for making a decision. The break-even point is where you recoup what you
spent on refinancing closing costs in the form of money saved in interest and
Here's a basic example:
Assume that it's going to cost you $3,000 to refinance your mortgage and doing
so lowers your mortgage payment by $150 each month. Divide $3,000 by $150 and
you get 20, which represents the number of months you'd need to recoup closing
costs with mortgage savings.
If you're planning to
move within the first year or two after refinancing, you may not see any
tangible return from lowering your interest rate, depending on where your break-even
point falls. On the other hand, if you're planning to stay in the home
long-term, you'd need to look at the lifetime savings.
This is where you'd
factor in what you've paid on the loan already, your new mortgage rate and
monthly payment and the new mortgage term. Say your original mortgage was
$300,000 with a 30-year term. Your starting interest rate was 4.25% and you're
10 years into your loan.
Refinancing into a
20-year term at 4% would trim $28 per month off your payment. But it would cost
you an additional $1,827 in interest, compared with sticking with your current
mortgage terms. You'd see a small monthly savings, but none where your interest
Now, assume that you're
only five years into the same mortgage term and you decide to refinance into a
20-year loan at 4%. In that scenario, your monthly payment would go up by $178,
but you'd save more than $4,000 in interest over the life of the loan. Running
different scenarios through a refinance calculator can help you decide whether
refinancing makes sense.
Think about the type of loan term you're planning to refinance
into. "A large savings can be realized if you reduce your term of the
loan," Dustman says. "The flip side to this is that if you extend
your term for several years beyond the maturity today, even at a lower rate,
you may end up paying higher interest over the longer period of the loan."
Refinance Without Closing Costs?
Refinancing with no
closing costs is available. You might assume these loans charge zero closing
costs to refinance, but that's not exactly accurate.
"With a no-cost
refinance, the lender essentially covers the closing costs rather than having
to pay them yourself," Walsh says. "In return, you will generally pay
a higher interest rate."
refinance could be an advantage if you need to refinance but don't have a lot
of cash to cover closing costs. What you have to consider, however, is how such
a loan could affect the amount you pay over the long term. A higher interest
rate means more interest paid over the life of the loan, even if the difference
in the rate is only fractional.
For example, say you
refinance a $200,000 mortgage balance into a 15-year term. You could pay a 4%
rate with $4,000 in closing costs paid out of pocket, or 4.25% with a lender
credit for closing costs. If you opt to accept the higher rate, you'd hang on
to your $4,000 for closing but pay approximately $4,500 more in interest at the
higher rate, an overall higher cost of $500.
The other scenario to
consider is having the closing costs rolled into the loan, in lieu of a higher
interest rate. In that case, your rate may not increase, but adding closing
costs to the loan means a higher loan amount. That could raise your monthly
payments. Besides that, you're also paying interest on the closing costs over
How to Save Money on Mortgage Refinancing
It's always a question
of whether the costs of mortgage refinancing will outweigh the benefits. But
there are some ways to bring the cost of refinancing down.
Improve your credit
scores are one of the most important factors lenders consider when you
apply for mortgage refinancing. Your credit score, along with your income and
other financial details, can determine whether you're approved for refinancing
and the interest rate you'll pay. The higher your score, the lower the rate you
may qualify for, which could mean less interest paid to refinance.
To help boost your
score, the most impactful factors are payment history and maintaining a 30% or
utilization. Credit utilization measures how much of your available credit
you're using. Paying bills on time monthly and lowering the balances on your
credit cards could add points to your credit score, which could make you a more
attractive candidate for refinancing.
carefully. Every lender is different when it comes to rates and terms for
refinance loans. So take your time and shop around to find the best loan
options. Start with your bank or credit union, but get rate quotes from other
financial institutions, including online lenders. Specifically, zero in on the
rates lenders offer for different types of refinance loans and the fees
associated with each one.
Check your bank for
refinance discounts. Some banks may offer an incentive to customers to encourage
refinancing – a discount or waiver of certain fees. For instance, your bank may
cut you a small break on your interest rate or not charge a loan origination
fee. Check your bank's website or call your nearest branch to find out if any
special promotions for refinancing exist.
Negotiate refinance fees
if possible. Once you've chosen a loan, don't accept the closing costs at
face value. Reach out to your lender to see if any of the various costs
associated with refinancing are negotiable. Some, like local recording fees or
property taxes that must be prepaid, may be set in stone. But others, such as the
application fee or credit check fees, may be up for discussion.
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