Offers to refinance a mortgage are extremely common. New homeowners may tell you that it sometimes feels like they encountered at least two or three refinancing mentions before the ink was even good and dry on their closing documents. While you certainly don’t have to refinance, there are times when it can make sense to do so. How much does it cost to refinance a mortgage? Knowing the answer to that question can prepare you to make smart financial decisions.
How Much Does It Cost to Refinance a Mortgage?
When you refinance, you replace your existing home loan with a brand new one. Why might you want to do it? How much does it cost to refinance a mortgage? What can you do to save when you refinance? What should you think about when you’re considering refinancing? Understanding a bit about these topics will help you feel confident about your decisions when it comes to refinancing.
Reasons That Homeowners Refinance
As NerdWallet points out, there are plenty of good reasons to refinance. A homeowner might want to snag a lower interest rate or reduce their monthly payment. They might be eager to pay off the loan earlier or get rid of their FHA mortgage insurance. They could want to access their home equity to pay down debt, remodel, invest, go back to school, or start a business. Or, they could want to switch from an adjustable-rate loan to a fixed-rate loan.
The Cost of Refinancing
Refinancing isn’t free. When you got your initial home loan, you had to pay closing costs. When you refinance to replace it with a new home loan, you’ll have to pay closing costs again. As The Mortgage Reports indicates, closing costs for homeowners who are refinancing average between two and five percent of the total loan amount. In some cases, you can roll these closing costs into the loan amount, so you don’t have to bring any cash to the closing table. However, you’ll still end up paying them as part of the loan.
Ways to Save When Refinancing
Rolling your closing costs into your loan doesn’t eliminate them. It simply means that you’ll pay them later as you repay the money that you borrowed. However, there are things that you can do that may reduce your actual closing costs and allow you to save money when you refinance. According to Credible, you may be able to cut the cost of refinancing by taking the following steps:
- Build your credit. Having a strong credit score and a solid debt-to-income ratio will help you secure the best rate and terms when you’re ready to refinance.
- Negotiate service fees with your lender. Ask your lender to waive or reduce their service fees. Doing so could save you hundreds of dollars in closing costs.
- Request to waive the appraisal. If your property has been appraised recently and prices haven’t shifted significantly, you can ask your lender to skip the home appraisal. If they agree, you’ll save the cost of the new appraisal.
- Use the same title insurance company. Working with the same title company that you used to purchase your home can produce substantial savings because they’ve already done much of the work. You can save up to 40 percent in fees when you refinance.
- Shop around for third-party services. Comparison shopping to get the best price for the home inspection and survey can help you keep costs lower.
- Pass on paying for mortgage points. When you buy mortgage points, you pay your lender to reduce your interest rate. This also reduces your monthly payment. However, if you already have a strong credit score, there’s no need to pay for mortgage points, so you can use your cash for other purposes.
Points to Ponder Before Refinancing
As Investopedia notes, refinancing can be a useful financial tool for homeowners. However, it comes with costs that can get the unwary into trouble, so it’s worth asking yourself certain questions before you refinance:
- Why am I refinancing? What is my goal?
- How much will refinancing cost me?
- Will you stay in the house long enough to break even on the cost of refinancing?
- Will refinancing help me save money?
When you’re interested in buying or refinancing a home, trust PrimeLending Twin Cities to help you find a home loan product that fits your needs. Our team of loan experts makes it simple by listening carefully and guiding you throughout the entire loan process. Contact us today to start the conversation.