Refinancing your mortgage can reduce your monthly payment and interest rate.
But with the closing costs associated with refinancing your mortgage, is it worth it?
We have heard about the new “no closing cost refinance” options available.
But what are the hidden costs? Could a no-cost mortgage refi cost you ten’s of thousands of dollars over the life of the loan?
Let’s dive into the numbers to see.
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Refinance Rates (November 2020)
30-year fixed-rate mortgage
15-year fixed-rate mortgage
5/1 adjustable-rate mortgage
Average Mortgage Refinance Closing Costs
The average closing costs to refinance a mortgage loan in 2019 is 1.5%. This figure will vary based on different factors, such as the loan type and your credit score.
On a $200,000 mortgage, the average closing costs will come out to 1.5%, or $3,000. If you are refinancing into a 30-year term, this means you will need to see a decrease by about $90 a month to break even.
The good news is that most lenders will allow you to roll the closing costs into the loan. This way, you do not have to pay any cash up-front.
How No Closing Cost Refinance Loan Work
A no closing cost refinance seems a little too good to be true.
In fact, it may be.
The truth is you’re going to end up paying something to refinance your mortgage.
Whether it’s in the form of closing costs, original fees, or a higher rate.
A no closing cost refinance will usually come with a higher interest rate for the lost costs. That rate could be as much as half a percent higher than if you were to pay closing costs.
A half a percentage point over the course of a loan will cost you tens of thousands of dollars over the loan, making it more expensive in the long haul.
Advantages of a No Closing Cost Refinance
- No additional lender fees
- Mortgage balance won’t increase
- Pay nothing out-of-pocket
Disadvantages of a No Closing Cost Refinance
- Higher interest rates
- Is more expensive over the life of the loan
- Not available from all lenders
How to Get the Best Refinance Rates
When you’re refinancing your mortgage, it’s critical to compare refinance offers from multiple lenders.
If you are being offered a no-cost refinance. It makes perfect sense to shop around still. You may find a better deal from a lender that does charge closing costs. Remember, these costs can usually be rolled into the loan, so you do not have to come out of pocket for them.
Types of Refinance Programs
Types of Mortgage Refinancing Options
Rate and Term Refinance
Traditional refinance to lower your current interest rate and loan term. Minimum 620 credit score.
Replaces your current mortgage with a new loan, plus up to 80% LTV in cash in one mortgage. Minimum 620 credit score.
Home Equity Loan
A second mortgage loan using the equity in your home. Up to 80% LTV. Minimum 680 credit score.
A line of credit to borrow from as needed. Up to 80% LTV. Minimum 680 credit score.
Streamlined FHA, VA, and USDA loan refinance quickly and easily. No income verification. Minimum 580 credit score.
HARP – The Obama Administration created the Home Affordable Refinance Program in 2009 to help homeowners whose home values decreased because of the housing market crash. HARP allows homeowners who are underwater on their mortgage to refinance their loans to a lower rate.
Rate and Term Refinance – This is a more traditional refinance option available for conventional mortgages. This refinance program allows borrowers to refinance their mortgage into a new 15 year, 30 years, or adjustable-rate mortgage.
Streamline Refinance – A streamline refinance is available to borrowers who have a Government-backed mortgage loan. An FHA, VA, 203k, and USDA streamline refinance are much easier and require less paperwork than traditional refinance loans. In some cases, lenders do not require a credit check or income verification for a streamline refinance.
Home Equity Loans – Home equity and HELOC loans use the equity as collateral for a second mortgage on the property. Homeowners can get cash by giving up some of their home equity up to an 80% LTV.
Refinance Loan Terms
Refinancing from a 30 year fixed rate into a 15-year rate mortgage is one of the more popular options people choose. 15 year refinance rates are as much as a full percentage point lower than 30-year rates. Not only will you pay off your loan faster, but you will also pay a lot less interest over the life of the mortgage.
Adjustable-rate mortgage – Refinancing out of a mortgage with an adjustable rate into a fixed rate makes a ton of sense. Adjustable-rate mortgages often have rates that will increase annually after a short term with a low initial rate.
What Makes Up Closing Costs on a Refinance Loan
Many lenders will require that a new home appraisal be performed on the property being refinanced to determine the loan to value ratio. The average home appraisal is between $300-$500 and is usually required to be paid up-front.
2. Application Fee
The new lender is charged the application fee for closing out your existing loan and opening a new mortgage. The average application fee cost is between $250-$400.
3. Loan Origination
The loan origination fee is a fee charged by a lender for originating the loan. This fee is usually what the loan officer is paid for completing the refinance for you. The typical loan origination fee is about 1% of the loan amount. For example: If you have a $200,000 mortgage, the loan origination fee will be around $2,000 or 1% of the refinance amount.
Lenders can charge to pull your credit report, and they pass this fee along to you. The typical fee is $15-$35.
5. Document preparation fee
Some mortgage companies may charge fees for preparing and mailing documents. These fees can range from $100 to as high as $400 – $500.
7. Title insurance
The original title search will usually not be sufficient when you are refinancing. The lender will ensure the property is free of any liens and that you are the legal owner. The title search and insurance combined can be between a couple of hundred dollars to $500.
8. Legal fee
Mortgage companies have lawyers examine each loan to ensure everything is legal. This fee is passed onto the borrower and can be as high as a few hundred dollars.
A no closing cost refinance may sound like a great thing. But, don’t fall for the tricky advertising. There’s always a cost to pay for a loan. Whether in the form of closing costs, or increased mortgage rates, the mortgage company will make their money.
Make sure you shop multiple lenders and compare refinance offers, both with and without closing costs.
To get the best deal, you have to look at the real numbers.
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