You don’t need to put money down to refinance your mortgage — but there are costs

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When you refinance your mortgage, you rarely need to make a down payment like you did when you obtained the initial loan. However, there are still costs involved in refinancing, so you may need to provide cash when you close. How much largely depends on the type of refinance.

Do you need to put money down to refinance a mortgage?

More often than not, you don’t need to put down money to refinance your mortgage. In the typical rate-and-term refinance, which lowers your interest rate and payments and/or shortens your loan term, lenders generally look for an 80 percent loan-to-value ratio (LTV) or lower and solid credit, not money down.

If your LTV isn’t in line with that threshold, however, you may be considering a cash-in refinance, which does involve bringing money to the table. The extra funds in a cash-in refinance can help you lower your monthly payments if you’re shortening the term, get a lower interest rate or bring your LTV to the point where you can rid of private mortgage insurance (PMI). Sometimes, putting money down can help you save more in the long run.

For a cash-out refinance, on the other hand, there is no down payment requirement. Generally, lenders limit the amount you can cash out to 80 percent of the equity in your home.

How much does it cost to refinance?

While in most cases putting money down isn’t necessary, refinancing does come with closing costs. The average closing costs to refinance total $5,000, according to Freddie Mac, and can include:

  • Appraisal fee
  • Loan origination fee
  • Credit report fee
  • Survey fee (if needed for property boundaries)
  • Discount points
  • Title search and insurance

For certain refinances, there is a newer fee to consider, as well. For closings after Dec. 1, 2020, Fannie Mae and Freddie Mac are levying a 0.5 percent fee on refinances in the amount of $125,000 or higher.

It’s possible to have some of these costs waived or have them rolled into your loan in a no-closing-cost refinance in order to avoid paying the costs upfront. The disadvantage to a no-closing-cost refinance is that you’ll pay interest on a higher loan amount and can end up paying much more over time as a result. If you won’t be in the home very long, however, a no-closing-cost refinance can be a good choice.

You can also try negotiating your closing costs. If you’ve had a loan with the lender in the past or are otherwise a customer in good standing, you might be able to persuade the lender to waive some of the costs. Additionally, there are some costs, like the appraisal or survey, that may not need to be performed if you’ve had them completed recently.

How to get the lowest refinance rate

Another way to reduce the cost to refinance is to get the lowest possible rate. Refinance rates are already near historic lows, but there are other steps you can take to ensure the best rate.

  • Improve your credit score. Take action to make on-time payments and reduce your credit utilization to improve your credit score. Also, review your credit report for errors and have any fixed as soon as possible.
  • Pay points. Depending on your situation and timeline, it might make sense to pay discount points. Generally, each point you pay reduces your mortgage rate by 0.25 percent, and one point costs 1 percent of the amount of the loan. So, if the mortgage rate on a $150,000 refinance would normally be 3 percent, paying one point could reduce it to 2.75 percent, at a cost of $1,500 upfront.
  • Shop around. One of the best things you can do to reduce your mortgage rate is to shop around. You can compare multiple lenders online to find the best deal, and then factor in any fees and closing costs.

With rates so low, refinancing can be worth the cost for many homeowners. It’s important to run the numbers to see what your costs are, and then consider how long you’ll be in the home, as well as how long it will take you to break even. Bankrate’s mortgage refinance calculator can help you compare different scenarios and decide what will work best for you.

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