Refinancing your mortgage can lower your interest rate, help shorten your loan term or convert equity into funds you need — but it comes with a price tag. Just like your first mortgage, you’ll need to consider the closing costs.
Why refinance your mortgage?
Simply put, spending some money now can save you more money in the long run — or help you access cash you need for a project right now. Here’s a rundown of some of the main reasons you might want to consider refinancing your mortgage:
- You can lower your monthly payment – If you have a fixed-rate mortgage with a rate that’s higher than market rates today, refinancing could help save you money on your monthly mortgage payment. In general, it’s a good idea to consider refinancing if you can lower your rate by one-half to three-quarters of a percentage point.
- You can shorten your loan term – You can refinance your 30-year mortgage to a 15-year loan to pay it off faster and for less interest overall.
- You can change from an adjustable-rate to a fixed-rate loan – If you have an adjustable-rate mortgage, now can be a good time to lock in a fixed rate. Interest rates are rising, so you might want to lock in a fixed rate before they get even higher and your next adjustment kicks in.
- You can get rid of private mortgage insurance (PMI) – If you’ve reached 20 percent equity in your home, refinancing is one way to eliminate PMI.
- You can get cash for your goals – If you want to pay down credit card debt or make home improvements, you can do a cash-out refinance, provided you have enough equity. Be sure to have a clear goal in mind for these funds, and be realistic about your spending habits. Do you plan to use the money for a discretionary expense, like a vacation, or for an investment such as furthering your education? If you plan to refinance other higher-cost debt, are you likely to run up debt again?
How much does it cost to refinance?
The closing costs for a mortgage refinance vary according to the size of your loan and state and county where you live. The average refinance closing costs increased by just under 5 percent in 2021 to $2,398 (excluding taxes), according to ClosingCorp.
Generally, you can expect to pay 2 percent to 5 percent of the loan principal amount in closing costs. For a $200,000 mortgage refinance, for example, your closing costs could run $4,000 to $10,000.
Here’s a breakdown of the fees commonly included in refinance closing costs:
|Application fee||$75-$300 or more|
|Origination and/or underwriting fee||0.5%-1.5% of loan principal|
|Recording fee||Cost depends on location|
|Appraisal fee||$300-$400 (more for a larger property)|
|Credit check fee||$25 or more|
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
How to lower the cost to refinance
1. Boost your credit score
Just as you aimed to for a certain credit score when you applied for your first mortgage, you’ll need to meet credit score minimums to refinance, too. The better your credit, the lower the interest rate you’ll qualify for when refinancing. To get the best rate you can, work on improving your credit before you start applying to refinance. Check your credit report at AnnualCreditReport.com and review it for errors. If you spot a mistake, you can dispute it by contacting the credit reporting agencies (Equifax, Experian or TransUnion). Maintain your credit by paying all of your bills on time, keeping your credit card balances well below the limit and paying more than the minimum amount, if possible.
2. Compare mortgage offers and rates
Compare refinance rates and terms from several banks and mortgage lenders. You could also work with a mortgage broker to get a range of offers. It’s wise to start with your existing lender, too. As a repeat customer, you could be eligible for discounts or special deals that could substantially lower your overall costs. In fact, some lenders offer free refi programs for customers. If your bank or lender won’t offer any savings opportunities, it might be worth shopping for a new bank altogether that’s offering deals for new customers.
While you’ll want to look at rates and fees, these are just the starting point. Be sure to compare the monthly payment with each offer, and when the interest on the balance is calculated (either at the beginning or end of the month). On most mortgages, the interest is calculated at the end of the month, which is more accurate, but it can’t hurt to check. Pay close attention to APR to get a full sense of your cost.
3. Negotiate closing costs
As with your first mortgage, look closely at the loan estimate from your lender to see the breakdown of costs. You may save yourself some money by negotiating closing costs, especially if you’ve shopped around and have more than one refinance offer in hand. If some fees seem unusually high, including the application fee, underwriting fee or rate-lock fee, it’s worth questioning the lender to see if these can be lowered. Remember, the lender wants your business, so it might be willing to budge if you show you’re prepared to walk away from a bad offer.
4. Ask for fee waivers
In the same vein, ask your bank or lender if it will waive or lower the application fee or credit check fee. You can also see if it will let you forgo a new home appraisal or property survey if you’ve recently had one done. Your lender might be willing to work with you, particularly if you’re an existing customer.
5. Assess whether to buy mortgage points
If you want to lower your closing costs, consider whether buying mortgage or discount points is worth it. While buying points lowers your interest rate, it’s usually best only when you expect to own the home for a long time and don’t plan to refinance again — even to pay for a major renovation later on. You can use Bankrate’s mortgage refinance calculator to help determine whether it’s worthwhile to buy points when refinancing.
6. Go with your original title insurer
In many states, title rates are regulated, but you can try to cut down your title services costs by asking your current title insurance company how much it would charge to reissue the policy for your refinanced loan. Doing this might cost less than starting over with a new company or policy. In addition, if you didn’t obtain an owner’s policy the first time around, consider getting one now.
7. Consider a no-closing cost refinance
If you’re low on cash, consider a no-closing-cost refinance. The name is a bit deceiving, as this isn’t free; however, it means you won’t have to pay fees at closing. Instead, the lender will either raise your interest rate or fold the closing costs into the new loan.
The advantage of a no-closing-cost refinance is that you don’t have to come up with thousands of dollars to pay the fees at the loan signing, which can make a particularly meaningful difference if you’re doing a cash-out refinance. By avoiding closing costs at the current time, you’re giving yourself a good position to cover whatever you’re hoping to pay for now — a home renovation or a wedding, for example. The downside, however, is that you could end up paying more over the life of the loan. In general, if you can’t cover the closing costs either upfront or over time, refinancing isn’t worth it.
Closing costs on a refinance can be substantial, so take time to shop around for offers and compare loan estimates to understand all of the costs involved. It’s worth trying to negotiate with the lender, as well, as sometimes closing costs can be waived or lowered. As rates continue to rise in the current market, it’s crucial to do the math to make sure you can break even and the time and money you’d spend would be worth it.