Refinancing your current mortgage can drop your monthly payment and interest rate. But with every new loan come closing costs. Is it always worth it? Let’s take a look at the numbers in the various refinance scenarios and see.
Average Mortgage Refinance Closing Costs
As of 2017, the average closing costs to refi a mortgage was 1.5%. This figure varies depending on your type of loan and FICO score. If you have a $200,000 mortgage, the typical closing costs for a refinance will amount to 1.5% or $3000. If you want to refinance your loan into a 30 year note, this means you need to see a drop of about $90 per month in your payment to make it worth it.
On the up side, most lenders allow you to roll your closing costs into your new loan. So you need not pay cash up front.
How Does a No Closing Cost Refinance Work?
A no closing cost refi sounds great, right? Almost too good to be true? Well in some ways, it is. The truth is, you will always end up paying somewhere to refinance a mortgage. Whether you pay up front or as part of the loan, you will be paying something – closing costs, origination fees or a higher mortgage rate.
A no closing cost refi usually has an interest rate that is a bit higher to make up for the closing costs the lender paid for you. The rate could be .5% higher over the life of the loan, which will cost you tens of thousands of dollars more in interest.
That said, there are advantages to a no closing cost refinance that are worth considering:
- No further lender fees
- Your mortgage balance will not go higher
- You pay nothing up front
Some of the disadvantages of a no closing cost refinance:
- You will pay a higher interest rate
- The cost of the loan is considerably more expensive over the years
- Not every lender offers a no closing cost option
How to Get the Best Refinance Rates
If you want to pull the trigger on a refinance, it is important to look at refi offers from several lenders. If you are offered a no closing cost loan, you should still shop around and see if you can find a better deal from another lender.
Types of Refinance Programs to Consider
- HARP: the Home Affordable Refinance Program is still available to homeowners whose values dropped during the crash. It allows people who are underwater on their mortgage to do a refinance at a lower rate. But this program is not intended for people who are behind on their mortgage.
- Rate and term refinance: This is a traditional refinance that is available for conventional and FHA mortgages. You can refinance your mortgage into a new, lower rate in a 15 year, 30 year or ARM loan. This type of refinance can come with closing costs paid up front or rolled into the loan, depending on the lender.
- Streamline refinance: This type of refinance is available to the borrower who has a loan backed by the US government, such as FHA, VA or USDA. These refinances do not involve cash out and are much easier to get. Less paperwork is involved, and the lender may not even check your credit score or income.
- Home equity loans: This is not a refinance on your first mortgage. It is a second mortgage that some borrowers use to pull out their equity. Closing costs also will average 1-3%.
Closing Cost Details on a Refinance
What comprises all those fees in closing costs anyway? Here’s the basic list:
- Home appraisal: Most lenders want a new home appraisal to determine what the loan to value ratio is. The typical cost of a home appraisal is $300 to $600, and must be paid up front.
- Application fee: Charged by the new lender to close the current loan and open a new one. Expect to pay from $250 to $400.
- Loan origination: Charged by a lender for originating a new mortgage loan. This fee is normally what the loan officer is paid to do the refinance. The common loan origination fee is approximately 1% of the loan amount.
- Credit report: Lenders will charge to pull a copy of your credit report. This fee can be up to $35.
- Doc prep fee: Some mortgage loan companies may charge additional fees to prepare and mail documents. The fees can be up to $400.
The bottom line is closing costs on a refinance will cost you approximately 1.5%, according to recent data. Whether you pay that up front or within the loan is up to you. Just note you will pay more over time on your loan if you choose to roll those costs into your new loan.
- No Closing Cost Refinance Mortgage Hidden Costs. (2017). Retrieved from https://thelendersnetwork.com/no-closing-cost-refinance-mortgage-hidden-costs/