Taking out a new mortgage costs money. Even if you already have a loan and want to refinance it, you’ll pay closing costs again. Just how much you pay depends on the lender. It also depends on the chosen program. There’s no cut and dry answer regarding how much you’ll pay when refinancing. However, we’ll provide you with a guide so you know what you can expect.
Typical Costs to Refinance a Mortgage
Following are the most common closing costs charged. You may find them called by different names, but the concept is the same:
- Origination fee – Lenders charge this as a blanket fee for all costs of refinancing.
- Discount fee – Some borrowers pay this fee to lower their interest rate. Lenders charge it as a percentage of the loan amount.
- Processing fee – Lenders charge this to cover the cost of going over your loan application and processing the required paperwork.
- Credit reporting fee – Credit reporting companies charge the lender for each credit report they pull. Lenders often pass the cost onto you.
- Title search – A title company must make sure there aren’t any new liens on your property. The title search won’t be as extensive as when you bought the home. The costs may be lower this time around.
- Title insurance – You must take out a new title insurance policy each time you refinance your loan. This covers the new lender in the event of a default.
- Appraisal fee – Some loan programs require a new appraisal to determine the value of the home. The fee varies by appraiser.
- Closing fee – The closing agent charges a fee to create the paperwork for your closing as well as go over it with you as you sign it.
Some lenders may charge other fees as well. Any lender you apply with will send you Loan Estimate 3 days after you apply. This will break down the closing costs for you. Make sure you review this document carefully before accepting a loan.
Can you Get Around Closing Costs on a Refinance?
What if you really don’t want to pay closing costs again? You remember what you paid on your original loan and you don’t want to do it again. Do you have options? There is one option. You can ask the lender for a no-closing-cost loan. It sounds great, but read on so you really understand it.
A no-closing-cost loan means the lender pays the closing costs. But, since lenders are in the business to make money, they must raise your interest rate. It may only be around 0.5% or so, depending on the lender. But this makes a difference in your payment. First, you’ll need to see if you qualify. With a higher payment, your debt ratio increases. If you were already close to the maximum, you may not qualify. If you do, though, determine if you are okay with the higher payment. We’ll discuss how to decide if a refinance is right for you below.
Can you Roll Closing Costs Into the Loan?
You may also roll the closing costs into the loan in some cases. It depends on the value of the home. Many programs limit your LTV or loan-to-value ratio. For example, an FHA loan allows an LTV up to 97.5%. If you refinance only 85% of that amount, you have room to roll the closing costs into the loan. This may mean a little more scrutiny on your loan application, though. Taking cash out of the equity to pay the closing costs is a “ cash out refinance.” You may run across a few more stipulations with this type of loan.
If you do roll the closing costs into the loan, remember, you’ll pay them off for the next 30 years. You should look at your finances to make sure it makes sense. Your $5,000 in closing costs will become much more when you pay the loan in full at the end of the term. Look at your Loan Estimate to see just how much they would cost you.
Should You Refinance?
Now the biggest question is whether you should refinance or not. Again, it costs money. Is it worth it? Not every person will have the same answer. It depends on your situation. We recommend determining your break-even point to make the right choice.
You can figure out your break-even point with the following:
- Figure out the total closing costs as stated on the Loan Estimate
- Figure out the monthly savings you’ll reap with the new loan
Once you have these totals, use the following equation:
Total closing costs/Monthly savings = Number of months to break even
The break-even point is when you’ll start realizing the savings. It’s the point you pay off the closing costs and actually save. Let’s say your break-even point is 60 months or 5 years. If you move before that time, refinancing isn’t worth it. If you will be in the home that long, though, you can then start saving. It may be worth it at that point.
Do Different Lenders Charge Different Closing Costs?
It’s important to keep in mind that lenders do charge different closing costs. We recommend that you check with at least 3 different lenders. This way you know how has the best offer. Don’t compare closing costs line by line, though. Instead, look at the total. This way you can determine your break-even point for each loan. Some lenders itemize their charges while others charge one lump sum origination fee. Either way, the bottom line is you pay for the refinance. Just how much you pay depends on which lender you use.
Knowing how much it costs to refinance your loan can help you make the right decision. Is it worth it to pay for a lower interest rate? It may only be if you stay in the home for a while. Focus on that break-even point and then decide from there what you should do. You may find that it makes sense to keep your current mortgage. You’ll only know once you find out the closing costs, though.Click to See the Latest Mortgage Rates»