How Much Does It Cost to Refinance a Mortgage?
Refinancing a mortgage is an option that can potentially help homeowners to save thousands of dollars per year. However, it does come with some upfront costs that make weighing the pros and cons important. How much does it cost to refinance a mortgage? Here's a look at what every homeowner needs to know.
Why Do Homeowners Refinance?
Homeowners who choose to refinance their homes approach this option from several different angles. For some, the goal is simply to make their current loan more favorable for their long-term goals of saving money. For others, refinancing is part of a strategy to tap into the value of a home to fund renovations and other projects. Here's a look at common reasons for refinancing.
- Lower Your Rate: If interest rates have dropped significantly since you closed on your home, refinancing gives you the opportunity to update your loan to the current lower rate. A better rate can lower monthly mortgage payments and interest costs over the life of the loan. Homeowners who have improved their credit since getting approved for a mortgage can also typically benefit from rate reductions.
- Change Your Term: For homeowners who are motivated to pay off their homes quickly, changing the term of the loan from a 30-year loan to a 15-year loan can make paying down a mortgage much faster.
- Switch Your Loan Type: A loan refinance creates an opportunity to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Homeowners often consider this option when the rate on an ARM is about to reset.
- Tap Your Home Equity: Homeowners who need to borrow money sometimes use a home equity loan or a home equity line of credit (HELOC) to tap into the value a home has accrued.
- Consolidate Debt: For homeowners with sufficient equity, using the money gained through refinancing can make it possible to pay off high-interest debt.
How Does Refinancing Work?
For homeowners who have already been through the mortgage process, the steps to refinancing will feel familiar. The first step is simply determining if you currently qualify for a mortgage refinance. For cash-out refinances, homeowners are generally required to have at least 20% equity in a home. Of course, a lender can answer all of the essential questions about what it takes to qualify for refinancing. Here's a look at the other steps of refinancing a home:
- Select a Lender: There's no rule that homeowners need to refinance with the same company handling their current mortgage. Compare rates, ask around for referrals, and see what's available!
- Apply: The next step is submitting an application for refinancing. Minus the purchase agreement, a refinancing application generally has all of the same steps as a mortgage application. Applicants are also asked to submit pay stubs, tax documents, and recent bank statements.
- Lock in an Interest Rate: Some applications may be offered the option to lock in an interest rate while the closing process moves forward. This protects you if rates rise during the mortgage process.
- Underwriting: This step involves working with your lender to provide all the necessary documentation about your financial situation as well as the home itself, so the lender can formally review and approve your loan.
- Complete an Appraisal: A lender appraisal usually involves a visit to the home from a licensed home appraiser who verifies that the home is worth the value stated on the loan.
- Review Documents: Homeowners who are in the process of refinancing should take time to read through the Closing Disclosure that the lender provides them prior to closing. After confirming terms, conditions, and closing costs, the homeowner will sign the document.
- Close: The final step is to sign all loan documents.
After closing, the homeowner will begin making payments toward their new mortgage in accordance with updated loan terms. The monthly payment may be different from the amount they have been paying up until this point. Homeowners choosing cash-out refinancing will typically receive their funds within five days of closing.
Understanding the Costs of Refinancing
Many of the same mortgage closing fees that apply when a house is purchased may occur again during the refinancing process. Factors that can influence refinancing costs include loan size, borrower credit score, loan type, loan term, mortgage type, property type, and the amount of home equity available. Here's what's involved in refinance closing costs.
Mortgage refinance fees
The cost to refinance a mortgage for the average homeowner totals anywhere from 2% to 5% of the new loan.
Application fee
Most lenders charge application fees when homeowners apply for refinancing. This is a nonrefundable fee that applies regardless of whether or not an application is accepted. Most application fees range from $50 to $500.
Appraisal fee
The purpose of an appraisal is to determine how much a home is worth. An appraisal is crucial for the lender's decision because it helps to determine the size of the new loan. After collecting an appraisal fee, a lender hires a professional appraiser on behalf of the homeowner.
Title insurance and search
While not always mandatory, most lenders require a title search and title insurance with a mortgage refinance. The cost can total anywhere from 0.5% to 1% of a home's purchase price.
Recording fee
A recording fee is something that's collected by your local government. Recording fees cover the registering or recording of the legal purchase of a property. While pricing can vary by location, most municipalities charge anywhere from $25 to $300 in recording fees.
Prepayment penalty
If a borrower's original loan had a prepayment penalty, the penalty fee may be collected when a loan is refinanced. Rules on this vary by lender and loan agreement. However, a borrower with a mortgage with a hard prepayment penalty may incur a fee when they refinance a home within three years of purchasing it because this is considered breaking the terms of the contract. Most prepayment penalties total 1% to 2% of the loan.
Inspection fee
If a home inspection is ordered, it might cost anywhere from $300 to $600.
Origination fees
Origination fees cover the administrative costs that go along with preparing mortgage documents. They can total up to 1.5% of a new loan amount.
Mortgage points
Mortgage points are often available for borrowers when they refinance into new loans. Each point purchased totals 1% of the borrowed amount.
Use This Mortgage Refinance Cost Calculator to Get an Estimate
Reasons to Refinance with New American Funding
NAF helps homeowners discover the right refinancing strategies for their goals. Offering a wide range of traditional and cash-out refinancing options, NAF may be able to help you to get better loan terms or use your home equity to fund your dreams while also potentially wiping out private mortgage insurance (PMI). Our incredible team makes figuring out home refinances easy. Contact us today!
FAQ
Can you get a "no closing cost" refinance?
Yes, a "no closing cost" refinance can be an option for some borrowers. However, the term is something of a misnomer because closing costs aren't truly erased. This arrangement allows you to replace your current mortgage without new fees by either rolling closing costs into the new loan balance or having the lender cover closing costs in exchange for a higher interest rate.
How much does it cost to refinance a Conventional loan?
Borrowers can expect to pay anywhere from 2% to 5% of the new loan principal when refinancing.
How much does it cost to refinance a VA loan?
VA loan refinances typically come with the same fee structures as other types of loan refinances. However, homeowners who use VA refinancing will also have to either pay an Interest Rate Reduction Refinance Loan (IRRRL) fee totaling 0.5% of the loan amount or a cash-out refinance fee totaling 2.15% of the loan total.
How much does it cost to refinance an FHA loan?
On average, FHA loan refinance closing costs total 2% to 5% of the loan total.