The cost to refinance a mortgage depends on all sorts of factors, including, but not limited to: the loan program, loan amount, loan term, location of the home, credit score, loan-to-value, debt-to-income, and current market conditions. So when you ask yourself, should I refinance my Mortgage, you will want to compare how much you’ll pay in closing costs to how much you will save over the remaining life of the loan. Your loan officer can help you run scenarios to see how much you will be saving.
Fees Associated with Refinancing
- Appraisal fee – some of the time you will need an appraiser to come out and re-value your house to refinance.
- Title fees – a lender’s title policy is usually required to refinance.
- Flood certification fee – this is how the lender verifies whether your home is in a flood zone.
- Credit report fee – this is the fee for pulling your credit report at the beginning of the loan process.
- Origination fee – some loan programs have an origination fee, up to 1.5% of the loan amount.
- Processing and Underwriting fees – these are flat fees charged by the lender to process and underwrite your loan.
Altogether, you can usually expect to pay somewhere between 1-2% of your loan balance in closing costs to refinance your home. When considering if this is a good investment to make, you’ll want to think about the reason that you are refinancing. Some reasons to refinance might include, but are not limited to:
- Lowering your interest rate which should be done without paying for any points.
- Taking out equity to consolidate debt or taking out equity for home improvements, this would be considered a cash out refinance.
- Removing PMI due to the current equity in your home.
If you are wanting to lower your interest rate, you’ll want to calculate how much you’ll be saving monthly with the new interest rate compared to the old one, and then divide your closing costs by that number. That is the number of months it will take you to recover what you spent to refinance your mortgage.
Your mortgage payment is $2,000, and by refinancing your payment will lower to $1,700
That is a $300 monthly savings
Your closing costs are $3,000
$3,000 / $300 = 10
So, in 10 months, you will have broken even on the cost to refinance, and the amount you are saving monthly on your payment.
To decide if that is worth it to you, consider how long you plan to stay in the home. If it’s longer than 10 months, you will be saving money to refinance.
To figure out whether or not it’s worth it to refinance for you specifically, talk to a loan officer and they can run numbers and scenarios with you. There might be an interest rate where it makes sense and will start saving you money very quickly, or maybe you already have a good interest rate where it just wouldn’t be in your best interest to try and lower it any further. It all depends on what you are hoping to get out of refinancing, and how much money it can save you in the long run.