When you borrowed money to buy your house, you negotiated the best interest rate and mortgage deal you possibly could. If rates have dropped since your original closing, you might be in a position to get an even better deal through a refinance. In some cases, refinancing your mortgage can save you thousands of dollars. But if rates have gone up, refinancing could cost you and you should consider other options like a Home Equity Line of Credit to borrow against your home.
Like many financial services, refinancing comes at a cost. If you've never gone through a refi before, you should know how much you can expect to pay in fees and whether that amount can be reduced. Having this information can help you decide whether a refinance is worth the money.
What is the average cost to refinance?
Refinancing costs vary by lender, but the average cost to refinance is between 2% and 4% of the loan amount. In other words, if you borrow $400K to refinance your mortgage loan, the cost will likely fall between $8K and $16K.
What makes up the costs to refinance?
Lending money comes with the risk that the borrower may default on payments. Refinancing charges help lenders defray the risks involved. There are a variety of different fees that lenders might charge, including:
Loan origination fee. This is a fee paid to the loan officer who ushers the loan application through the process.
Loan application fee. The loan application fee is a general fee for filing the paperwork with the lender.
Recording fee. Home loans are a matter of public record. Some communities charge recording fees to add this information to the public record.
Attorney fees. If the lender requires an attorney to review the paperwork, they may charge a fee for it.
Appraisal. The appraisal fee is paid to the appraiser or appraisal company that comes to the home to determine its value.
Loan underwriting fee. The underwriting fee is another fee charged to the borrower for the processing of the loan application.
The list above is not comprehensive, nor do all lenders charge the same fees. Call around to find out how much a refinance would cost with various lenders. Ask them to list all closing fees and estimate the approximate closing costs. Many lenders allow closing costs to be rolled up into the loan amount, but if a lender requires you to pay the closing costs up front, you'll need to know that.
What about no-cost refinances?
Some lenders occasionally offer a no-cost refinance. Think twice before accepting any no-cost refinances. This kind of refinance appears to cost less on the front end, but may be more expensive over time. Lenders who offer no-cost refinances often recoup their costs by increasing interest rates and collecting more over the term of the loan.
Do the math to find out how much more you'll spend on the refinance over time. Consult with a financial adviser if you're not sure about the bottom line. Your financial adviser can provide clarity that can help you decide if the deal is really worth it.
What are "points"?
Discount points are a fee paid to the lender at closing in exchange for a reduced interest rate. Each point purchased reduces the rate by a certain amount, lowering the monthly payment amount.
To determine whether the amount paid for the points upfront will save you money over the life of the loan, you will need to run the numbers. If you feel you can’t make such a determination on your own, get a trusted financial adviser to do the math for you. In any event, you can expect it to take some years of lower mortgage payments to recover the cost of buying points.
What should I look at when comparing loans?
When comparing multiple loans from different lenders, consider the following factors:
What are the fees?
How much will you pay per month?
How much will you pay over the life of the loan?
How do these figures compare with your monthly payments now and with how much you're projected to pay over the term of your current loan?
If you're having a hard time comparing costs, talk to a financial adviser or accountant to determine whether a refinance will be beneficial in the long run.
What's the best way to get a deal on a refi?
It might surprise you to learn that some lenders will negotiate. After getting quotes from several different lenders, you might be able to use these quotes to negotiate with loan officers.
If your credit score is low, plan to wait a little while and reapply for a refinance when your credit score is higher. Pay your bills on time and pay down your debt. Lenders will interpret your low credit score as increased risk for them, resulting in higher interest rates and other fee increases.
