When mortgage interest rates decrease, many homeowners start to wonder whether they should refinance their existing mortgages to get a lower rate or a different loan term. However, the additional closing costs you pay when refinancing can sometimes make refinancing more expensive in the long run.
In some cases, the amount of interest you’ll save by refinancing may not be enough to cover the fees and expenses of the added closing costs, which means you’ll spend more money, not less, to refinance your home loan.
That makes deciding whether or not to refinance a tricky road to navigate. Before embarking on any mortgage refinance journey, it’s imperative to review all the closing costs associated with the loan to ensure you’ll save money in the end.
Basics of a mortgage refinance
There are many good reasons to refinance your existing mortgage to help you save money over the long term. For instance, you may get a reduced interest rate or shorten the length of the loan when refinancing. In fact, there are several reasons people choose to refinance, so it’s not a one-size-fits-all solution.
Some of the reasons for refinancing include:
- To reduce your monthly payment: Many homeowners refinance in order to reduce the amount of their monthly loan payment. This can be accomplished by reducing your interest rate or extending the length of your loan as part of your refinancing.
- To reduce the length of your loan: If you’re in good financial shape, you may consider refinancing to increase your monthly payment. That can help you pay off your loan faster and with less total interest.
- To change the type of mortgage: Refinancing allows you to change an adjustable-rate mortgage to a fixed-rate mortgage so you can avoid paying higher interest rates. You could also change from an FHA loan to a conventional loan to avoid the extra mortgage insurance that comes with FHA loans.
- To get cash: Refinancing isn’t just for lower rates or term changes. You can tap into the equity in your home with a cash-out refinance. This type of refi replaces your existing mortgage with a loan for more than you owe. In turn, you get access to cash for large expenses such as home improvements, college tuition or paying off other debt.
What are mortgage closing costs?
When you refinance your mortgage, you will need to pay for similar closing costs to the ones you paid with your existing mortgage. Refinance closing costs include things like loan origination fees, underwriting expenses, home appraisal costs and attorneys fees.
Other factors help determine your closing costs too — like the area you live in or the lender you choose. You need to get a full list of all refinance closing costs to determine whether the closing costs will exceed the amount you will save over the life of your new loan.
In most cases, you’ll pay the refinancing closing costs at the time you close on your mortgage refinance loan. However, some lenders offer the option of “no closing costs” refinancing, which means you won’t pay your closing costs upfront.
With most “no closing cost” refi loans, the closing costs will be added to your new mortgage loan balance instead of requiring upfront payment at closing. That makes it cheaper to refinance on the front end, but you will pay interest on the amount that’s rolled into your loan for closing costs. In other cases, your lender may charge you a higher interest rate in lieu of rolling the closing costs into your new loan.
How much are mortgage closing costs?
How much should I pay in closing costs for a refinance? The answer to that question isn’t cut and dry.
Mortgage refinance closing costs vary based on the total amount you borrowed to purchase your home, along with the lender you choose, the area you live in and other factors.
On average, closing costs range between 3% and 6% of your mortgage loan principal. For example, if you borrow a total of $ 150,000 to buy your home, the average closing costs could range between $ 4,500 and $ 9,000.
If you borrow $ 250,000 to buy your home, your closing costs could range from $ 7,500 to $ 15,000 on average.
A mortgage balance of $ 500,000 would have average closing costs between $ 15,000 and $ 30,000.
These costs are made up of a number of smaller fees and charges. For example, the average for a loan application fee is between $ 75 and $ 300. Average costs for attorneys fees are between $ 500 and $ 1,000, while title search and title insurance could cost between $ 700 and $ 900.
Loan origination fees are typically between 0% and 1.5% of the loan principal, meaning the amount you’d pay would vary based on the amount you owe. For example, if you owe $ 200,000, your loan origination fee could be as much as $ 3,000.
These wildly varying amounts are why it’s important to get a full disclosure of all closing costs. You need to know what you’re being charged to determine if refinancing will make good financial sense for you.
Tips on closing costs
As with your mortgage refinance itself, there is often room to negotiate on some of your closing costs. Some charges aren’t negotiable, but others are, and cutting down on those individual charges can help reduce the total amount of your refinance closing costs.
Start by shopping around for a refinanced mortgage loan to find the most favorable terms. Your current lender may be motivated to keep your business and could charge you less for these types of costs, but it will depend on your lender. They could be willing to waive or reduce certain fees if you’re lucky.
Shop with other lenders, too, including online lenders that may offer some very competitive terms compared to brick-and-mortar lending institutions. You can also outline the terms of what you’ve been offered by other lenders to see if there’s wiggle room in these costs.
Be wary of “no closing costs” refinancing. You may not have to pay for closing costs up front with these types of loans, but you often end up paying more over time due to higher interest rates or more principal to pay down.
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Too long, didn’t read?
Refinancing your mortgage could be a great way to save money over the life of your mortgage loan. You still have to pay closing costs on a refinance loan, though, so it’s important to evaluate whether those costs outweigh your savings due to a lower interest rate or longer loan term.
Talk with multiple lenders and ask questions about closing costs to get all the answers you need to make an informed decision.
