While the benefits can be many, refinancing a mortgage comes at a cost. Most fees are listed under your loan’s closing costs and generally run between 2% and 5% of the loan amount. But you’ll also want to watch out for prepayment penalties and other charges.
Mortgage refinance closing costs
Your closing costs are a set of charges that are due at closing, which can vary by state and lender. A few typical fees included in your closing costs are:
|Application fees||You must pay this even if you change your mind or if your application is denied.||$75 to $300|
|Loan origination fees||Administrative cost of processing your loans. Origination fees may include a series of smaller fees bundled together.||0% to 1.5% of the loan amount|
|Appraisal fees||Your lender sends an appraiser to assess your property’s value.||$300 to $700|
|Title report and insurance fees||Your lender initiates a title search to make sure you are the legal owner and there are no liens against the property.||$700 to $900|
|Flood certification fees||An assessment of whether your property is located in a flood zone.||$15 to $25|
|Inspection fees||A third-party inspector performs an examination of your home to check for issues such as structural damage or termites.||$175 to $500|
|Attorney fees||Expect this fee if your state requires an attorney to be present during closing.||$500 to $1,000|
|Early repayment fees||If you switch lenders, it could charge a penalty to close your loan early. This fee should be spelled out in your loan agreement.||2% to 4% of the original loan amount|
Altogether, your closing costs may total about 2% to 5% of your final purchase price. For example, if you’re refinancing a $300,000 mortgage, your average refinance cost might run you between $6,000 and $15,000.
Even if your new monthly payment saves you, say, $100 a month, it may take years before you can recoup what you’ve spent on the closing costs. You may want to avoid refinancing if you plan to move or sell your home before you can recoup your money.
Ways to lower your refinance closing costs
A few tips for how to reduce your closing costs:
- Compare lenders. Closing costs can vary from lender to lender. Shop around and get a few estimates from various lenders to make sure you’re getting the best deal.
- Negotiate. Some refinance closing costs have a bit of wiggle room. Although most lenders won’t lower their origination fees, your original lender might be willing to waive application and processing fees if it means keeping your business and you have a spotless payment record.
- Shop around. Your loan estimate includes a list of services you can shop around for. Compare costs for third-party services like title insurance, home inspection and the appraisal
- Ask about discounts. Some lenders offer special discounts on their mortgages. For example, Bank of America’s Preferred Rewards members can receive up to $600 off origination fees on a refinance.
- Consider a no-closing-cost refinance. Some lenders are willing to waive closing costs in exchange for a higher interest rate or roll the charges into the loan balance. Instead of the upfront refinancing costs, you’ll likely pay more interest over the course of the loan. Be sure to calculate if it still makes sense to refinance.
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Reasons to refinance your mortgage
There are several good reasons to consider a mortgage refinance.
- Lower your interest rate. A refinance can help you take advantage of dropping mortgage rates, which can lower your monthly payment and save you in interest over the life of the loan.
- Change the length of your loan. Refinancing from a 30- to a 15-year term helps you pay off your mortgage faster. Or, if you’re struggling to keep up with your payment, you can refinance to extend the length of your loan. Opting for a longer loan term can lower your monthly payment, but you’ll end up paying more interest over the course of the loan.
- Tap into your home’s equity. A cash-out refinance lets you take out a new loan for more than your current mortgage balance, and you keep the difference in cash. Your home equity acts as collateral.
- Switch from an ARM to a fixed term. If you started with an adjustable-rate mortgage (ARM), you may want to refinance to a fixed-rate mortgage before your interest rate rises.
- Convert FHA to conventional. You may be able to get out of paying private mortgage insurance (PMI) on your FHA loan by refinancing to a conventional loan once you have 20% equity in your home.
To get new rates on your loan, you have to go through the entire loan process, which comes at a cost. Consider using a mortgage refinance calculator to make sure refinancing is a smart move and can actually save you money.
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