How Much Does It Cost To Refinance?
Mortgage interest rates are rising for a number of reasons, meaning mortgages are getting more expensive — this also means that the opportunity to lock in a lower interest rate by refinancing may be fading for some mortgage borrowers. If you are thinking of refinancing and haven’t gotten around to it, rising rates may give you all the more reason to get the ball rolling.
The good news is that despite the gains over the last year, mortgage interest rates are still quite low compared to where they’ve been over the last few decades. So if you have an older mortgage, a refinance could still be a good way to save money.
“This current rate environment is an anomaly in the arc of history, people should be taking advantage of it,” said Samuel Boyd, senior vice president at Capital Asset Management Group in Washington, D.C.
This article explains how to figure out if refinancing makes sense for you and talks your through the various types of refinancing available.
Closing costs for refinancing
Before you refinance, consider how much you’ll have to pay in closing costs and compare that with how much the refinance will save you over time. Closing costs vary by state and circumstance.
According to Bob Lund, the vice president of residential lending at Bethpage Federal Credit Union, closings costs for a refinance can total around 2% to 3% of the overall amount borrowed. “It is a closing process similar to a purchase,” he said.
The table below breaks down common costs and fees.
|Common Mortgage Refinance Costs and Fees|
|Document preparation fee||$200-$500|
|Title search and insurance||$700-$900|
|Flood certification fees||$15 to $25|
|Origination fees||1-1.5% of total principal|
When trying to figure out if a refinance is worth it, a major factor to consider is how long you plan to stay in your home. You want to weigh the closing costs against your monthly savings and future goals. If you plan to stay in your current house for the long haul and a refinance gets you access to a better interest rate or term schedule, the savings can be significant. However, if you are considering a near-term move, it might not be worth it.
“If you plan to sell the place within the next five to 10 years, chances are you are not going to recoup the closing costs,” Boyd said.
Reasons to refinance
There are a number of reasons to consider refinancing your home.
Tap your home equity. A cash-out refinance can provide an opportunity for a homeowner to improve on their mortgage terms while also getting access to additional cash. Unlike other types of refinancing, the new loan from a cash-out refinance will be larger than the balance on the original loan. This is because the borrower is taking out additional capital, using their home equity as collateral. If a homeowner needs capital and they can secure a better interest rate or loan term at the same time, it could make sense to choose a cash-out refinance over other types of borrowing, like, for example, a home equity loan.
Use this cash-out refinance calculator to figure out what your new mortgage payments would be.
Lund said he sees clients using a cash-out refinance to cover education expenses, weddings or to make home improvements. Using a cash-out refinance to renovate or expand your house can improve the value of your property and the interest could be tax deductible.
Another reason to consider a cash-out refinance is to pay off higher-interest debts, like credit card debt or personal loans. “In the scenario of paying off really expensive debt versus closing costs, that math works,” said Boyd.
Lenders are also seeing an increase in borrowers using cash-out refinances to pay off variable-rate HELOCs, which will become more expensive as interest rates rise.
Lower your rate. A rate refinance can lower the interest rate of a mortgage and substantially lower the monthly payments. The homeowner is issued a mortgage with a new interest rate, but no new money is borrowed. How much the homeowner saves depends on the rate of their original mortgage, the rate of the new mortgage and the closing costs. The financial savings build up over time as the homeowner makes monthly payments with the lower interest rate. They can be substantial, especially for those who took out higher interest rate loans in the late ‘90s and early 2000s.
Use this refinance calculator to see how much you can save.
Another reason to consider a rate refinance is if the borrower’s circumstance have changed. If your employment record is much better than when you bought your home, your credit has improved substantially or your monthly income is a lot higher, you might be able to refinance at a much better rate.
Change your loan term. A term refinance is a new mortgage that has a different length from the original mortgage. The new mortgage can be shorter or longer. For example, a homeowner can refinance at 15-year fixed loan into a 30-year loan or vice versa. If you find you are having trouble making your mortgage payment, refinancing to a 30-year fixed would lower the amount you have to pay each month. If you suddenly end up with a higher salary and the capacity to make bigger monthly payments, refinancing to a shorter term loan could help you lock in a lower overall interest rate.
Boyd currently recommends refinancing a 15-year fixed into a 30-year, since such a choice gives borrowers access to long-term capital at a low-interest rate.
It’s also possible to change your rate and term at the same time, in what is known as a rate and term refinance.
Convert ARM to fixed. An adjustable rate mortgage, or ARM, is a mortgage that has a low teaser interest rate for a set number of years and then switches to an adjustable rate. The new adjustable rate is based on market factors, rising as interest rates rise. Since mortgage rates are currently heading higher, some people may choose to refinance their ARMs into fixed rate mortgages.
There are a number of factors to consider in this scenario. You should closely compare the terms of your ARM and what fixed interest rate lenders are willing to offer you. Your potential savings are also dependent on the long-term direction of interest rates, something that’s tough to predict — experts disagree about whether the current increases in mortgage rates will continue. You may also prefer to have a routine, set payment of a fixed mortgage rather than the changeable payment of an adjustable rate loan.
Bob Lund sees converting from an ARM to a fixed as mostly about personal preference: “How comfortable you are with the payment increasing? Or do you want to wait it out?
Convert FHA to conventional: Another refinancing option is to convert a government-backed FHA loan into a conventional mortgage. The major advantage of switching to a conventional loan is that you will no longer have to pay mortgage insurance premiums. FHA loans require the homeowner to pay monthly to insure against the extra risk the government’s taking on, since loans are offered with as a little as a 3.5% down payment. Once you have 20 percent equity in your home, you may be able to refinance an FHA loan with a conventional home loan and drop the mortgage insurance.
How to lower mortgage refinance costs
Looking to reduce your refinancing costs? Here are few tips.
Shop around. Closing costs and the terms of the refinancing offers can vary lender to lender. Speak to a variety of lenders and ask them to lay out all the costs associated with refinancing.
Negotiate. The fees and charges associated with refinancing are up for negotiation. A lender might be willing to reduce or waive some, especially in-house charges like application or origination fees. Speak up and see if they can offer you a better deal.
No closing cost refinances. Many lenders offer what they call a no closing cost or zero closing cost refinance. With this sort of refinance, some or all of the upfront fees and charges for closing are waived, but that doesn’t mean you never pay the charges. The lender will either charge you a slightly higher interest rate or add the closing costs to the balance of the loan. A no closing-cost refinance may get you out of jam if you don’t have enough money to pay the charges now, but just be warned — over time you’ll likely end up paying more.
Interest rates are still low enough that many people can save by refinancing on their current mortgages, but you have to take closing costs into account. A refinance only makes sense if you’ll recoup the initial charges and fees over the long-term.
Boyd gives clients strict instructions about what to do with added capital from a rate or term refinance — don’t just spend the money or park it away.
“Anytime you refinance debt and realize additional cash flow, it needs to be redirected to your financial priorities,” he said.