Many homeowners are considering a mortgage refinance as rates have been on a general upswing in the last 18 months. Even though they are higher than they were, rates are still historically low, so now could be a good time to refinance. But if you are thinking about it, it is important to know what it costs to refinance.
Before you actually close the loan, you should consider how much you will pay in closing costs and compare that with the money that the refinance will save you over the years. Closing costs can vary by circumstance and state. Generally, closing costs for a mortgage refinance will total 2-3% of the overall amount borrowed. (lendingtree.com)
Below are some of the most common costs and fees you will pay for in a mortgage refinance:
- Application fee: $75-$300
- Document preparation fee: $200-$500
- Appraisal charges: $350-$500
- Title search and insurance: $700-$900
- Flood certification fees: $15-$25
- Inspection charges: $300-$500
- Recording fees: $240
- Origination fee: 1-1.5% of total loan amount
As you are trying to determine if refinancing is for you, a major factor to think about is how long you intend to stay in the house. It is important to weigh the closing costs against what your monthly savings will be, as well as your future goals. If you want to stay in your home for many years, and the refinance gets you a lower rate, the savings can be major. But if you are thinking about selling in the next two or three years, the refinance may not be worth the cost. Experts say if you plan to sell in the next five or 10 years, you are probably not going to recoup your costs.
A major reason people want to refinance is they want to tap their home equity. A cash out refinance can give you a chance to improve the terms of your mortgage and also give you access to cash. Unlike other sorts of refinances, a new loan from a cash out refinance will be bigger than the balance on your original loan. This is because you are taking out more money and using the home as collateral. If you need cash and can get a better rate and/or term, it can make sense to do a cash out refinance rather than a second mortgage, such as a home equity loan.
It is common for homeowners to use a cash out refinance to handle college expenses, home improvements and weddings. Many experts say the best use for a cash out refinance is to renovate or expand the home to boost its value.
It also is common for homeowners to do a cash out refinance to pay off credit cards and personal loans. You can save a lot of interest charges. However, be leery of paying off all that debt and then running up the credit cards again. Because at that point, now you have credit card debt again, plus debt with your house as collateral.
Get a Lower Rate
A refinance on the rate alone can reduce your mortgage payment each month and really save you a lot of interest over the years. You will be issued a new mortgage with a lower rate but you are not borrowing more money. How much you will save depends on your original interest rate, what the new rate is and your closing costs. The savings financially can build up over time as you make monthly payments with the lower rate.
Change Loan Term
A term refinance is a new home loan with a different length than the original loan. You can refinance your 15 year fixed rate loan into a 30 year loan or the other way around. If you are having a hard time making your mortgage payments, doing a refinance to a 30 year mortgage lowers what you have to pay each month. If you suddenly start making more money and can make bigger payments, switching to a 15 year mortgage could be a great move, as you will save huge in interest charges by cutting years off the mortgage.
Convert ARM to Fixed
An adjustable rate mortgage has a fixed rate for 3,5 or 7 years, then switches to a rate that adjusts every year. If interest rates are rising, you may want to lock into a fixed rate with your refinance.
Now that you have a better idea how much a refinance costs and your different refinance options, check with your lender to see if refinancing today is a good move for you.
- How Much Does It Cost to Refinance? (n.d.). Retrieved from https://www.lendingtree.com/home/refinance/how-much-does-it-cost-to-refinance/