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Refinancing gives you the opportunity to adjust details of your mortgage, such as the term or interest rate. By refinancing, it’s possible to lower your mortgage interest rate and monthly payments, resulting in some long-term savings.
It’s important to remember, though, that refinancing basically means getting a new mortgage to replace your current loan. And just as there were expenses (aka closing costs) when you got your first mortgage, there are costs that come with refinancing.
Ah, but not all expenses are created equal. Here are some ways to improve your chances of getting a low-cost refinance.
How much does it cost to refinance a mortgage?
If you want a low-closing cost refinance, it’s important to understand what expenses you might be on the hook for.
- Loan origination fee – typically 0.5% to 1% of the mortgage principal
- Appraisal fee – typically $500 – $700
- Survey fee (if needed to determine property boundaries) – $400 – $1,000+
- Credit report fee – $30 – $100
- Title fee (including title search and insurance) – about $300
- Taxes – varies by location
- Discount points – 1% of the loan amount per point
Depending on your lender, you might be able to have some of these waived. Your lender has to provide you with a complete rundown of the fees in your loan estimate. You can also find out which fees are negotiable.
How to lower the cost of refinancing
When getting a low-cost mortgage refinance, there are some steps you can take to lower the overall cost.
1. Get the lowest possible rate
Qualifying for the lowest possible mortgage refinance rate is one of the best ways to save money long-term. Here are some tips for ensuring that you’re likely to get the most favorable rate:
- Review your credit report. Take a look at your credit report to make sure there aren’t errors. Fixing mistakes can help you boost your score.
- Improve your credit score. Your debt-to-income ratio (DTI) plays a big part in the terms you’re offered. See if there are some loans you can pay off or outstanding credit card balances you can pay down. Ask to increase your credit limits on any cards. Don’t let delinquent accounts ding your score: Make payments on time and for the minimum amount, at least.
- Build your savings. If possible, add to your savings. With more savings, you might be seen as less of a risk, and score better rates as a result.
- Choose your loan term wisely. A shorter loan term usually means a lower rate but often a higher monthly payment. If you can afford the higher payment on a 15-year refinance, you might be able to get a better interest rate than what you’d receive with a 30-year term.
- Organize your affairs. Know exactly where you stand, what paperwork you need and what to expect. When you’re organized, you’ve got more information and you’re in a better position to negotiate.
- Compare rates online. Take a look online to see what mortgage refinance rates are available. This can give you an idea of what to expect. Be sure that you’re comparing the annual percentage rate, or APR, on offers, since this includes other fees related to the mortgage. The advertised interest rate doesn’t include these extra fees, and that can impact your costs.
- Lock in your rate. When getting approval, see if you can lock in your mortgage rate. Locking in your rate can help protect you against increases as long as the loan closes within a set period of time. Lenders might even allow you to take advantage if rates decline during the lock period.
2. Consider a no-closing-cost refinance
One way to get a low-cost refinance is to avoid closing costs altogether. With a no-closing-cost refinance, you don’t incur any upfront fees. That can save you money — at least in the short term.
However, you need to make sure you understand whether your lender is actually waiving your closing costs or simply shifting some of the fees. There are two main ways that no-closing-cost refinances work to help you avoid paying a lump sum upfront:
- Higher interest rate: Your lender might charge you a higher interest rate to make up for the no-closing-cost refinance. The lender still ends up recovering what you would have paid in closing costs because you’re paying more in interest.
- Roll fees into the principal: The lender can add the closing costs to your overall loan balance. Convenient — no need to dig up cash on closing day — but it increases the total sum you’re borrowing, and the amount that interest is going to be calculated on.
One caveat: Both of these scenarios result in paying more in interest over time, either because of the higher rate or because you have a bigger principal amount.
3. Compare mortgage lenders
You are not required to refinance with your current lender, and you can get a better mortgage rate simply by shopping around with multiple lenders. In fact, a study by Freddie Mac estimates you could save an average $600 annually over the life of your loan by obtaining at least two rate quotes. At least four rate quotes could save more than $1,200 annually.
Plus, iIf you get an attractive quote from one lender, you could have leverage with the next — or your primary mortgage place.
Where to start? Bankrate has compiled a list of top mortgage refinance lenders to consider.
4. Consult with your lender
You can also try negotiating your closing costs with the lender. Certain fees might be able to be reduced or waived, so ask if there are discounts or waivers available. Sometimes, if you’re already a borrower with the lender, or if you can show some other compelling reason (like you’ll choose another lender with a better offer), you might be able to get a break. If you don’t ask, you don’t get.
How to calculate if refinancing is worth it for you
Whether refinancing is worth it depends on your individual situation as well as the numbers. However, it’s not just about avoiding upfront closing costs. How long you’ll be in the home and your own preferences play a role in the decision, too.
In particular, a no-closing-cost refinance can work well if you won’t stay in the home for very long: a good rule of thumb is if you plan to be out of the house within five years. If you can save on overall costs before you plan to move out, it might be worth the cost, and even be a net benefit.
With a loan like this, though, the extra or higher interest can add up to much more than the original closing costs if you keep the loan for another 15 to 30 years — so if you plan to stay put, consider other options. It might make more sense to pay your closing costs upfront in a lump sum, rather than doing something that increases the interest you pay.
Even if you’re remaining in the home, refinancing still can be worth it — if you can save much on interest and payments, either with a lower interest rate or a shorter loan term.
Bottom line on a low-cost refinance
There are a variety of ways to score a low-cost refinance, from qualifying for the best rates to avoiding closing costs, from juxtaposing mortgage offers to negotiating with lenders.
You can use a mortgage refinance calculator to determine your total costs and how much you’ll pay over the long and short terms. Run the numbers and consider your circumstances to make the choice that works best for you.
Additional reporting by T. J. Porter