What factors influence the cost of refinancing?
The cost of refinancing will vary between homeowners, but it generally ranges between 2% to 6% of the amount of the loan. Some of the factors that influence how much refinancing will cost include:
- Your lender.
- The size of your loan.
- Your location.
- Your available home equity.
- Your credit score.
- Your mortgage type.
- Your mortgage term.
It's important to consider how much you will have to pay in associated costs when you are thinking about refinancing. While refinancing your house can sometimes save you a lot of money over time and even lower your monthly house fees, you'll want to make sure that the closing costs don't offset the benefits of refinancing.
How much does it cost to refinance your house?
In general, the cost of refinancing is between 2% and 6% of the mortgage amount. It's worth your time to delve into the specifics, though, because depending on the size of your loan there can be a big price difference depending on where your costs fall in this range.
For example, say your loan amount is $300,000. If refinancing costs you 2% of the size of your loan, this means you'll pay $6,000. However, if refinancing costs you 6% of the size of your loan, that means your closing costs are more like $18,000.
In the above scenario, let's say that refinancing is going to save you $300 a month on your mortgage. In the first example where closing costs were $6,000, that means it will take you 20 months to break even. In the second example, though, it will take you 60 months (that's five years!) before you recoup the cost of the closing through savings.
Applying to refinance your house typically costs between $75 and $300. Here you are paying for the costs of processing your request, which includes the cost of your lender running a credit check. Generally, even if your refinance request is denied you won't be able to recoup this fee.
It's possible that your original mortgage includes a prepayment penalty. This means that you will have to pay extra fees for ending your loan early, even though you will be continuing to live in the same home. These penalties typically cost about 2% to 4% of the original amount of the loan or one to six months' worth of interest payments.
Sometimes, though, you can negotiate with your lender and get these penalties reduced or eliminated. You will have more negotiating power if you've been making house payments in full and on time and generally been a responsible borrower.
Your home will usually have to be appraised again when you are applying for refinancing, just like it was when you bought the place. It's worth noting, though, that government-backed loans like USDA, FHA, and VA mortgages have their own set of rules regarding whether or not an appraisal is required.
If you do need an appraisal, this will cost between $300 and $700 in most instances.
Home inspection fee
A home inspection usually costs between $175 and $300. Even though you most likely had your home inspected during the purchasing process, the condition of a property can change over many years. For this reason, a lender is motivated to recheck the home and property for any potential issues that have shown up since you first bought the place.
You might be able to save some money by reaching out to the home inspector who did your initial home inspection. Sometimes, they will be willing to give you a discount due to the fact that you're a repeat customer.
Title search and title insurance
Your lender will need to run a title search and get title insurance as a part of your refinance, much in the same way they did when you got your first mortgage. It's possible that issues like new liens on the property have cropped up since the initial search.
This process usually costs somewhere between $700 and $900. You might be able to save some money by finding the original title report copy, as this can help save the lender some time.
Attorney review/closing fee
This will usually cost you between $500 and $1,000. These are fees that go to the title company or lawyer who is responsible for conducting the closing. In this instance, there isn't a lot of wiggle room for negotiating the price. Lawyers and title companies often charge a fixed hourly rate, so the cost of this generally is what it is.
If you don't have 20% equity in your home when you're refinancing, you will continue to pay private mortgage insurance. This is estimated by the Fed to cost between 0.5% and 1.5% of the principal on your loan.
For FHA mortgage insurance, there is an annual premium and it costs 1.75% at closing. For a USDA mortgage you will pay a 1% guarantee fee and to refinance a VA loan you'll pay a 0.5% funding fee.
Luckily, most refinance transactions don't require that your property have a new survey completed. However, anything that would have been discovered during an updated survey won't be covered by title insurance.
If a survey was recently done on your property, you probably don't need a new one. If you do end up needing a survey, it usually costs between $150 and $400. If your lender requires a comprehensive survey, it could cost even more.
What do I need to refinance my home?
When you're an adult, the stacks of paperwork are endless, so let's go over the proper documentation that you need to remember to refinance your home.
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You'll need to gather: your tax returns, your proof of income, basic credit reports, and any statements of any assets or debt.
How can you lower the cost of refinancing?
Refinancing is always going to cost money, but there are things you can do to spend less during the process. Be wary of "no closing cost" refinancing options, because this typically means that the costs are actually just bundled into the loan. While this might seem convenient if you don't have a lot of extra cash lying around, it also means that you'll be paying interest on that borrowed money for the rest of the life of the loan or you'll end up paying a higher interest rate on the loan.
Improve your credit score
A good credit score and a credit history without any knicks or dings in it can help give you the leverage you need to get the best possible offers for refinancing. To improve your credit score, reduce your outstanding debt, pay your bills on time, and dispute any errors you find on your credit report.
You can stick with the lender you already have if you want, but it's a good idea to shop around to find the best deal. It's typically recommended that you apply for a loan with somewhere between three to five different lenders to compare the fees and loan terms. Make sure to bundle your applications around the same period of time so that it only reads as one hard credit pull.
Negotiate the costs
Some, but not all, of the associated fees can be negotiated. You might find that a lender is willing to waive or reduce some of the origination, application, or other fees. Plus, you'll never know if you don't ask, right? Also, if you're thinking about selling instead of refinancing, you might be wondering what to fix up. Check out this article to learn more.
What are the benefits of refinancing?
While the process of refinancing might not be your idea of a good time, it can end up having major financial benefits depending on your circumstances. Let's take a look at some of the common reasons why people refinance their mortgage and the benefits they can receive by doing so.
You can lower your monthly payment
If you are refinancing to a lower interest rate, you can spend less money every month on your mortgage payment. Experts often suggest that it is worth refinancing if you can lower your rate by 0.5%-0.75%. Anything less than that and it might be more advantageous to stick with your current mortgage.
You can pay less in total over the life of the loan
Many homeowners never sit down to look at just how much money they are spending in interest over the life of their loan. When you refinance, it means that over the course of the mortgage you can spend less money paying off your home. While this might seem more abstract than having lowered monthly bills, it's also a major financial win over time.
You can change the length of your loan
Some people might choose to shorten their loan length while others might go for a longer term. If you refinance to a 15-year mortgage, you can pay a lot less interest overall and own your home outright in half the time. That being said, the monthly payments will be higher.
Other people might refinance to restart a 30-year loan cycle or to switch from a 15 year to a 30-year loan. This can help to lower your monthly payments and gives you more time to pay off the entirety of the loan.
Are you thinking about selling and wondering about the pros and cons of iBuying? Check out this article.
You might be able to get rid of private mortgage insurance
Sick of paying private mortgage insurance and already have 20% equity in your home? Then you might consider refinancing so that you can drop that cost entirely.
For some government-backed loans, PMI is present for the entire life of the loan. In these instances, you might consider refinancing to a conventional loan if you have built enough equity.
You can take cash out of your equity
A house is a great investment, but it also isn't very liquid. All of the cash that you've put into it over the years is sort of locked up in the physical structure. Wouldn't it be cool if you could treat your house like an ATM, withdrawing equity in the form of cash at your leisure?
While that isn't exactly possible, the next best thing is a cash-out refinance. This is when you get a new loan for your home where you borrow more than you owe. You then get the difference in cash, which you can put towards a home project, paying down debts, or pretty much anything you please.
Cash-out refinances are popular as a form of paying off other debt because the interest rates are often lower for mortgages than for other types of loans or credit cards. This means that you can end up saving quite a bit of money on interest over time.
You can change from an adjustable-rate to a fixed-rate loan
If you have an adjustable-rate mortgage, you might consider refinancing to lock in some of these historically low-interest rates.
While adjustable-rate mortgages mean that your monthly payment can fluctuate quite dramatically from month to month, fixed-rate mortgages can allow for much more streamlined budgeting. Plus, with interest rates as low as they are, it might mean that you can lock in the lowest possible monthly payment for the rest of your loan.
Should you refinance your house?
It can be difficult to decide whether it's a good time to refinance your house or whether it's better to stick with the current terms of your mortgage. Understanding the associated costs can help you learn whether or not refinancing will make financial sense for you and your family.
If you're planning on moving out of your home soon, refinancing might not be worth the time, money, and effort. If you're thinking about selling in the near future, you might want to take advantage of the current seller's market.
Are you wondering how much money you could sell your house for? Are you hoping to avoid the headaches of repairs, showings, and selling on the traditional market? If so, check out our home valuation tool here!