Cost To Refinance A Mortgage: How Much Will You Spend?

Refinancing your home can be a strategic move to lower your mortgage payments, reduce your interest rate or access your home equity. However, it's essential to understand the costs involved to make an informed decision. The cost to refinance your mortgage typically includes several fees. While these costs might seem significant, they can also lead to potential long-term savings, making refinancing a practical option for many homeowners looking to improve their financial situation.

Costs To Refinance: At A Glance

Refinancing your home can save you money, but it's important to know the costs involved. Knowing these costs helps you decide if refinancing is a good move for you. Some of the factors that can affect the costs of refinancing are:

• Lender fees: These include application fees, origination fees and other charges imposed by the lender.
• Loan amount: The total amount of the loan can impact closing costs and other fees associated with refinancing.
• Location: Different regions may have varying taxes, insurance rates and other expenses that can influence refinancing costs.
• Type of refinance: Whether it's a rate-and-term refinance or a cash-out refinance can affect the overall cost structure.
• Type of home loan: Different types of loans, such as conventional, FHA or VA loans, may have different fees and requirements.
• Discount points: These are optional fees paid upfront to lower the interest rate on the loan, which can impact the overall cost of refinancing.

Reasons To Refinance Your House

Homeowners might refinance their homes for several reasons, including the ability to:

• Get a lower interest rate. Refinancing can help you secure a lower interest rate than your original mortgage, which might reduce your monthly payments and the total amount of interest paid over the life of the loan. This can be especially beneficial if market rates have dropped since you first took out your mortgage.
• Modify your loan term. Refinancing allows you to change the length of your loan term. You can extend it to lower your monthly payments or shorten it to pay off your mortgage faster and save on interest. For example, switching from a 30-year to a 15-year term can significantly reduce the total interest paid.
• Change your loan type. Refinancing gives you the option to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. An ARM typically offers a lower interest rate at the start of the loan. However, after a set period (usually 5, 7 or 10 years), the interest rate can increase. To avoid paying more, some homeowners refinance their ARM into a fixed-rate mortgage, ensuring a stable interest rate.
  
  You can also refinance a fixed-rate mortgage into an ARM. This may be a good idea if interest rates are dropping or if you plan to sell your home before the initial period of lower, fixed interest ends. This can provide more predictable payments with a fixed rate or potentially lower initial payments with an ARM.
• Take out cash. With a cash-out refinance, you can borrow against your home’s equity. This means you take out a new loan for more than you owe on your current mortgage and receive the difference in cash, which can be used for home improvements, debt consolidation, investments or other financial needs.

How Much Does It Cost To Refinance A Mortgage?

Typically, closing costs range from 2% to 6% of the loan amount. For a $300,000 loan, this means you might pay between $6,000 and $18,000. However, there are some variables that may affect the final closing costs.

Types Of Refinance Costs

Here are a few of the typical refinance costs found in a refinance Closing Disclosure.

When Are The Costs To Refinance Worth It?

The refinance break-even point is when the savings from your refinance equal the costs you paid to refinance. Calculating this break-even point is essential, as it shows how long it will take to recover your refinancing expenses. To calculate the break-even point, divide the total cost of refinancing (closing costs) by the monthly savings from the refinance. This will give you the number of months it will take to recover the closing costs.

Once you’ve calculated your break-even point, you’ll need to decide if refinancing is worth it. You may have heard of something called the 1% refinancing rule of thumb. This suggests that if you reduce your current interest rate by 1% or more through refinancing, you’ll save money. Even better, you can still save a significant amount of money by dropping your mortgage rate by less than 1% on many loans. This can end up potentially saving you thousands on your mortgage.

How To Lower Your Refinance Costs

Lowering your refinance costs can make the process more affordable and increase your overall savings. Here are a few ways to lower your costs.

Bring Your Credit Score Up 

Having a good or excellent credit score is crucial for securing a competitive mortgage refinance rate. On the other hand, a fair or poor score may result in higher interest rates or even disqualification. To improve your credit score:

• Pay your bills on time: This makes up a big portion of your credit score, so don't miss any payments.
• Keep your credit card balances low: If you're using a lot of your available credit, it can hurt your score. Try to keep it below 30% of what you can spend.
• Don't close old accounts: The longer you've had credit, the better it looks. So, if you have old credit cards that are in good shape, it's best to keep them open.
• Check your credit report for mistakes: Sometimes there are errors that can bring your score down. You can get a free copy of your report from AnnualCreditReport.com and file claims to correct any mistakes you find.

Lenders also prefer borrowers with a low debt-to-income (DTI) ratio, ideally below 36%. If you can decrease your debts or increase your income, you might lower your DTI. This could help you qualify for a cheaper mortgage refinance loan.

Shop Around For Other Loan Offers

While sticking with the first lender you find might seem convenient, it's wise to explore your options. Consulting multiple lenders lets you compare loan amounts, interest rates, terms, financial requirements and closing processes to find the best fit for you. For instance, a lender offering a mortgage rate lock policy can help you secure a low interest rate while you search for a home.

There are several ways to find a lender. Ask friends or family who recently bought a home about their lender. Your real estate agent may also recommend reputable lenders in your area. Additionally, you can research online and compare rates and reviews from various lenders.

Negotiate For Lower Closings Costs

To negotiate lower closing costs, ask about any discounts or rebates lenders may have available. You can also look into grants and cost assistance programs. Or, use quotes from other lenders to try and lower the price with your preferred lender.

Pursue A No-Closing-Cost Refinance

One way to lower refinance costs is to consider a no-closing-cost refinance. Certain lenders provide no-closing-cost loan options, typically with a trade-off of a higher interest rate. Although this saves you from immediate upfront expenses at closing, it ends up costing more over time. Essentially, the lender covers these costs while you pay a higher interest rate, resulting in increased expenses in the long term.

The Bottom Line

Understanding the costs associated with refinancing your mortgage is crucial for making informed financial decisions. From closing costs to interest rates, each factor plays a significant role in determining the overall expense of refinancing. By assessing these costs and exploring various options, homeowners can ensure that refinancing works with their long-term financial goals, ultimately leading to greater savings and financial security. If you’re interested in refinancing your mortgage, start the refinancing process today.