When mortgage rates drop, many homeowners wonder if they should refinance their existing mortgage to get a lower interest rate or a different loan term. However, the additional closing costs you pay when you refinance can sometimes make refinancing more expensive in the long run.
In some cases, the amount of interest you save by refinancing may not be enough to cover the fees and expenses of the additional closing costs. This means that you are spending more, not less, on refinancing your home loan.
Deciding whether or not to refinance a refinancing makes it difficult to navigate. Before embarking on a mortgage refinance journey, it is imperative to review all of the closing costs associated with the loan to ensure that you will end up saving money.
Mortgage Refinancing Basics
There are many good reasons to refinance your existing mortgage in order to save money in the long run. For example, you can get a reduced interest rate when refinancing or shorten the term of the loan. In fact, there are several reasons why people choose to refinance. So it is not a one-size-fits-all solution.
Some of the reasons for refinancing are:
- To reduce your monthly payment: Many homeowners refinance to reduce the amount of their monthly loan payment. This can be achieved by lowering your interest rate or extending the term of your loan as part of your refinancing.
- To reduce the term of your loan: If you are in good financial shape, consider refinancing to increase your monthly payment. This can help you repay your loan faster and with less total interest.
- To change the type of mortgage: Refinance allows you to change a variable rate mortgage to a fixed rate mortgage to avoid paying higher interest rates. You can also switch from an FHA loan to a traditional loan to avoid the extra mortgage insurance that comes with FHA loans.
- To get cash: Refinancing isn’t just for lower interest rates or term changes. You can tap into the equity in your home with a payout refinancing. This type of refi replaces your existing mortgage with a loan for more than you owe. In exchange, you get access to cash for large expenses like home improvement, college tuition, or paying off other debts.
What are typical closing costs?
When you refinance your mortgage, you will have to pay closing costs similar to what you paid on your existing mortgage. Closing fees for refinancing include, for example, borrowing fees, subscription fees, home appraisal fees, and legal fees.
Other factors will also determine your closing costs – like the area you live in or the lender you choose. You need to get a full list of all refinancing closing costs to determine if the closing costs are more than what you will save over the life of your new loan.
In most cases, you pay the closing cost of the refinance at the time you close your mortgage refinancing loan. However, some lenders offer refinancing with no closing costs, which means you don’t pay your closing costs up front.
Most no closing cost refi loans have the closing cost added to your new mortgage loan balance rather than requiring an upfront payment on completion. This makes refinancing cheaper at the front end, but you pay interest on the amount that was added to your loan for closing costs. In other cases, your lender may charge you a higher interest rate instead of including the closing costs on your new loan.
How much does the refinancing cost?
How much does it cost to refinance a mortgage? The answer to this question is not cut and dry.
The cost of mortgage refinancing varies based on the total amount you borrowed to purchase your home along with the lender you choose, the area you live in and other factors.
On average, the closing cost is between 3% and 6% of your mortgage loan. For example, if you borrow a total of $ 150,000 to buy your home, the average closing cost could be anywhere from $ 4,500 to $ 9,000.
If you borrow $ 250,000 to buy your home, your closing cost can average anywhere from $ 7,500 to $ 15,000.
A mortgage balance of $ 500,000 would have an average closing cost of between $ 15,000 and $ 30,000.
These costs are made up of a number of smaller fees and charges. For example, the average for a loan application fee is between $ 75 and $ 300. The average cost of attorney fees ranges from $ 500 to $ 1,000, while title searches and property insurance can range from $ 700 to $ 900.
Borrowing fees are typically between 0% and 1.5% of the loan capital. This means that the amount you would pay would vary based on the amount you owe. For example, if you owe $ 200,000, your loan origination fee could be up to $ 3,000.
Because of these very different amounts, it is important to fully disclose all closing costs. You need to know what you are being billed to determine if refinancing makes financial sense for you.
Tips on closing costs
As with your mortgage refinancing itself, there is often room to negotiate some of your closing costs. Some fees are non-negotiable, while others are. Reducing these individual fees can help reduce the overall amount of your refinancing completion costs.
Start by buying a refinanced mortgage loan to find the most affordable terms. Your current lender may be motivated to keep your business going and may charge you less for these types of costs. However, it depends on your lender. You might be willing to forego certain fees or cut them down if you are lucky.
Make purchases from other lenders as well, including online lenders, who may have very competitive terms compared to brick and mortar credit institutions. You can also describe the terms and conditions that other lenders have offered to you to determine if these costs are leeway.
Be careful about refinancing with no closing costs. You may not have to pay the closing costs for this type of loan upfront, but over time you often pay more because the interest rates are higher or there is more principal to pay off.