Do you want to refinance your mortgage to a lower rate?
Before you do, make sure you know the true cost of refinancing your home loan. There are fees and closing costs to consider.
In this article, we’re going to go over all the costs associated with refinancing so you can make sure it will benefit you.
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Is Refinancing Worth it?
This is a common question many homeowners have when thinking about refinancing a home loan. Refinancing requires a lot of paperwork, takes time, and it isn’t free.
So before you waste your precious time dealing with the hassle of getting a loan, you want to make sure it’s genuinely worth it.
For a refinance to be worth your time, it will largely depend on the amount of closing costs involved and the rate of the loan. The interest rate is critical, and one of the most common reasons for refinancing. A quarter of one percent difference in the interest rate can save, or cost, you tens of thousands of dollars.
Average Cost to Refinance a Mortgage
As an example, let’s say your mortgage has a balance of $200,000. If you were to refinance that loan into a new loan, total closing costs would run between 2%-4% of the loan amount. You can expect to pay between $4,000 to $8,000 to refinance this loan.
A no-cost refinance loan is when the lender waives the closing costs, so there are no upfront costs to the borrower. However, you should be aware that the lender makes up this money from other aspects of the mortgage, such as a higher rate to make up for the lost revenue.
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How to Lower the Costs of Refinancing
Negotiate with Your Lender
You may be able to negotiate some of the fees with your lender. See if you’re able to use a previous home appraisal or can choose some of the vendors used for the title or home inspection.
Get Offers from Multiple Lenders
Closing costs and other fees will vary lender to lender. It’s best to compare loan estimates from at least three different lenders. You can even use those loan estimates to help you negotiate an even better deal.
Use our loan comparison calculator to compare loan offers to see which is the best deal.
Improve Your Credit Score
A higher credit score will not only equal a lower credit score, but you will be offered a better deal with lower refinance costs.
The easiest and quickest way to increase your credit score on a time crunch is by paying down your credit card debt. Try to lower your credit card balances to less than 15% of the credit limit to maximize your FICO score before applying.
Available Types of Refinance Programs
You can use the built-up equity in your home to get cash using a cash-out refinance. A cash-out refinance is a new loan for the amount of your mortgage plus up to 80% of the loan-to-value ratio that you would receive as cash. The new loan will have a single loan payment.
Home Equity Loan
A home equity loan is similar to a cash-out refinance because you are using your home equity as collateral for a loan. A home equity loan is a separate loan, also called a second mortgage. You can borrow up to 80% of the LTV ratio with home equity loans or HELOCs.
Rate and Term Refinance
A rate and term refinance is your typical mortgage refinance where you are doing so to take advantage of the low-interest rates and get a new loan term. Refinancing will lower your mortgage rate and your monthly mortgage payment.
A streamline refinance is available for home loans that are backed by the Government, such as FHA loans. As the name suggests, the refinance process is streamlined, requiring little paperwork
FHA streamline refinance loans allow homeowners with FHA loans to refinance their mortgage to a lower rate without tons of paperwork.
Costs of Refinancing a Home Loan
Refinancing your mortgage can be a costly process. Closing costs are fees charged by lenders for funding the loan. Closing costs can range from 1%-5% of the loan amount. These closing costs can typically be rolled into the mortgage loan.
Loan Application Fee
When you refinance your mortgage, you’re getting an entirely new mortgage. Lenders charge between $100-$300 for the loan application fee. However, some lenders may waive this fee, or you can negotiate to have the fee reduced or waived altogether.
Loan origination fees are how mortgage companies compensate the loan officer working on your application. Origination fees are between 1%-3% of the loan amount on average.
The Home Appraisal
A home appraisal is a professional estimate of the market value of a property. In most cases, lenders will require a new appraisal to be performed on your home to determine it’s value.
There are several documents you will need to sign to complete your loan, including truth-in-lending, seller disclosures, etc. You can expect to pay somewhere between $200-$400.
Title Search Fee
The title company will need to perform a search to ensure the seller has the legal right to sell the home. The title is often called a deed. You can expect to pay around $200-$400 for the title search fee.
Recording fees are assessed to have the refinancing part of the public record. They are determined by the government organizations in each state or community. Expect to pay from $25 to $250.
Homeowners of property located in a federally designated flood zone may be required to add flood or life of loan insurance coverage. To get a certification, expect to pay $50 to $150.
Home Inspection fee
A home inspection is not always required, but in some cases, a lender may need it. The inspection is performed to check the property for any potential issues. The average home inspection costs between $300-$500.
Lenders may charge a fee for having their attorney review all documents to ensure everything is completely legal. Lender fees can range from $300-$1200.
The home survey documents boundaries for the property. A professional survey costs between $100-$350.
Discount points are pre-paid interest you can pay up-front to lower the interest rate on your loan.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.