Whether you want a lower interest rate, longer repayment term, or cash from your home\u2019s equity, you might be thinking about refinancing your mortgage. But a mortgage refinance is not free. Here\u2019s what you need to know about refinance costs to decide if it\u2019s right for you.<\/p>\n
Read more: <\/em>The best mortgage refinance lenders<\/em><\/p>\n When you refinance a mortgage loan, you\u2019ll pay closing costs similar to those you paid when you bought the home. Refinance closing costs cover fees for processing and finalizing the transaction and can be 2% to 6% of the loan amount.<\/p>\n For example, refinancing a $400,000 mortgage could cost you $8,000 to $24,000. The amount you\u2019ll pay varies depending on various factors, such as your location and which mortgage lender you use, but here\u2019s a general breakdown of common refinance costs.<\/p>\n Dig deeper: <\/em>When it makes sense to refinance your mortgage<\/em><\/p>\n Your costs will depend on your mortgage lender, the type of home loan refinance you\u2019re pursuing, and more. But here are some of the most common refinancing closing costs and what you can generally expect to pay.<\/p>\n In addition to the above costs, you may need cash to cover the first one or two months of homeowners’ insurance and property taxes.<\/p>\n Dig deeper: <\/em>7 strategies for reducing closing costs<\/em><\/p>\n The cost of refinancing a home loan can differ based on the following details:<\/p>\n Loan amount:<\/strong> Several fees are expressed as a percentage of the loan principal. The higher the loan amount, the more you can expect to pay in closing costs.<\/p>\n<\/li>\n Loan term:<\/strong> While the closing costs may be similar, you\u2019ll pay more in interest and monthly fees with longer loan terms.<\/p>\n<\/li>\n Refinance type:<\/strong> Refinancing a conventional loan may be cheaper than an FHA loan, which requires mortgage insurance. FHA Streamline loans can cost less if you can bypass a home appraisal. Riskier options, like cash-out refinancing, can cost more since you\u2019re increasing the loan amount.<\/p>\n<\/li>\n Property type:<\/strong> Refinancing a condo may require prepaying HOA fees. Investment properties and unique builds can have higher appraisal costs. And larger properties will generally mean a higher loan amount, which also impacts closing costs<\/p>\n<\/li>\n Location:<\/strong> Certain costs, such as and taxes, are governed by local laws, so where you live determines how much you pay.<\/p>\n<\/li>\n Credit score<\/strong>: A mortgage refinance is a loan, so lenders will still use your credit score and history to determine your ability to repay. Mortgage lenders tend to offer lower interest rates to applicants with higher credit scores.<\/p>\n<\/li>\n Home equity: <\/strong>Lenders generally require private mortgage insurance (PMI) if you have less than 20% in home equity, which is your home\u2019s value minus the outstanding mortgage. You won’t have to pay PMI if you have at least 20% equity when refinancing a conventional loan.<\/p>\n<\/li>\n Lender:<\/strong> \u2014 like those for underwriting, originating a loan, and submitting an application \u2014 depend on your chosen lender. For example, some mortgage lenders don\u2019t charge an application fee.<\/p>\n<\/li>\n<\/ul>\n It\u2019s pretty much impossible to avoid all refinancing costs, but there are ways to get a low-cost refinance.<\/p>\n Lenders generally reward creditworthy homeowners with lower interest rates, and a strong score could give you more power to negotiate fees. A \u201cgood\u201d FICO score is at least 670, while exceptional scores are 800 or higher.<\/p>\n You can improve your score by making on-time payments, paying down debts, and checking your credit report for any errors that need correcting.<\/p>\n Learn more: <\/em>9 options for refinancing your mortgage with bad credit<\/em><\/p>\n See what refinance rates you qualify for with your current lender, but don\u2019t stop there. Prequalify with multiple lenders, comparing interest rates, fees, and other loan terms to ensure you get the best deal.<\/p>\n Not all closing costs are negotiable, but some are. Ask your loan officer which fees can be waived or reduced. You may have more leverage negotiating if you have good to excellent credit, a lower debt-to-income ratio (DTI), and other factors that signal an attractive borrower.<\/p>\n A lender may offer a no-closing-cost refinance, but it\u2019s important to read the fine print. In many cases, you won\u2019t have to pay the fees up front, but you\u2019ll end up paying them in some other way. A lender can roll the costs into the loan (leaving you with a larger mortgage principal) or increase your interest rate to compensate. Either way, you\u2019re not paying anything at closing, but you’ll pay more in interest overall.<\/p>\n Similarly, you can lower or eliminate how much you pay up front by asking for a lender credit, which is when the lender reduces or removes your closing costs in exchange for a higher interest rate.<\/p>\n Since a refinance can be expensive, it\u2019s crucial to calculate your break-even point to determine whether it\u2019s worth the costs.<\/p>\n The break-even point tells you how long it will take, in months, to recoup the money you spend on refinancing. Calculate it by adding up your costs and then dividing them by your monthly savings.<\/p>\n Total refinance costs \/ monthly savings = refinance break-even point (in months)<\/p>\n For example, if your closing costs total $6,000 and you expect to save $300 per month, your break-even point will be 20 months.<\/p>\n $6,000 refinance costs \/ $300 monthly savings = 20 months<\/p>\n That means it will take a little over a year and a half until you begin realizing actual savings. If you plan to move before then, refinancing wouldn\u2019t financially make sense. The longer you stay in your home, the more savings you accumulate from the refinance.<\/p>\n Keep reading: <\/em>How soon can you refinance a mortgage after buying a home?<\/em><\/p>\n A mortgage refinance will typically cost between 2% to 6% of the loan amount. Some fees are set by the lender, so it\u2019s worth shopping around and asking which ones can be lowered or waived. Other factors that can impact your costs are the type of refinance, the amount of equity in your home, and your creditworthiness.<\/p>\n While there is a lot to consider with a mortgage refinance, calculating the break-even point is one way to determine whether it\u2019s worth it. Take your estimated closing costs and divide them by your monthly savings to understand how long it\u2019ll take to recoup those expenses. If your break-even point is three years, but you only plan to stay in the home for two more years, it\u2019ll end up costing you more than you save.<\/p>\n Your existing mortgage lender may offer discounts or deals if you refinance with them, but that\u2019s not always the case. It\u2019s best to compare offers from multiple lenders, comparing interest rates, repayment terms, and discounts. If you find a better deal with a new lender, you can always ask if your current lender will match the offer.<\/p>\n<\/p><\/div>\n\n
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