The Real Cost of Refinancing Your Home Mortgage
Many homeowners love the idea of refinancing their mortgage to grab cash for both financial needs and wants. Sure, there may be some paperwork and costs involved, but the positives certainly seem to outweigh the negatives.
For instance, here are some pretty good reasons to refinance:
- Secure a lower interest rate
- Make a lower monthly payment
- Pay off your loan sooner
- Get rid of mortgage insurance
- Get cash from home equity, like a home equity loan from Discover Home Loans, to make home improvements, consolidate other debt or to finance a variety of other needs
All of these advantages come with opportunities to save money, which you can then use to achieve your other financial goals.
However, you may not know all the factors that could influence refinance closing costs and other fees. Here's a breakdown to help you decide if refinancing is right for you:
Typical costs to refinance your home mortgage
There's no one typical or average cost to refinance your mortgage. Your closing costs will depend on the type of loan you want, your loan amount, where you live, the fees applicable to your loan, and whether you choose to pay discount points to lower your rate, among other factors.
Moreover, refinancing costs can vary widely. For example, an appraisal of a modest home in a small town might cost as little as $300, while an appraisal of a large or custom home in a major metropolitan area might cost $600 or more.
This checklist shows most of the refinance closing costs you may be charged:
- Loan application fee. Some lenders charge a nonrefundable upfront fee when you apply for a new mortgage. Loan application fees of $250 to $500 aren't unusual.
- Loan origination and documentation fees. Most lenders charge these or other similar fees to process your loan application and, if your loan is approved, close and fund it. These fees may total approximately 1 percent of your loan amount.
- Home appraisal fees. You may have to pay for an appraisal to refinance so your lender can determine whether you have enough equity to qualify for the loan you want. Appraisal fees are typically $300 to $500.
- Title search and insurance. A new title search and title insurance policy are usually required when you refinance. Fees vary, but $150 to $200 is the usual range for a title search. Title insurance may cost about 1 percent of the home.
- Flood certification fee. This fee enables your lender to determine whether your home is located in a federally designated flood zone. If it is, you may be required to purchase flood insurance as a condition of your loan. Expect to pay around $20 for flood certification.
- Recording fee. This governmental fee is typically required to record your new refinance mortgage in the public records. Recording fees tend to be in the $100 to $250 range.
- Discount points. Discount points are a type of prepaid interest that you can choose to pay upfront when you get a new loan to lower, or "buy down," your interest rate. One point equals 1 percent of your loan amount.
"There are some lenders, such as Discover® Home Loans, who charge no fees at closing and also keep fixed rates low, from 4.99% - 9.99% APR* for first liens."
Refinancing with no closing costs
In some instances, borrowers complete a no-closing-cost refinance because they don't want to pay closing costs out of pocket. Instead, the lender pays the closing costs or adds them to the loan amount. A loan with lender-paid closing costs typically will have a slightly higher rate.
There are some lenders, such as Discover Home Loans, who charge no fees at closing and also keep fixed rates low, starting at 3.99% APR.
5 Tips to lower your refinancing costs
Whether you pay your closing costs in cash or choose a no closing costs refinance, you'll want to take advantage of opportunities to lower your costs to refinance.
Here are five strategies:
- Negotiate with your lender. Some lenders offer special promotions for homeowners who refinance. Ask your lender what the current offers are and if you're eligible.
- Shop around. Refinancing costs can vary, sometimes dramatically, from one lender to another. You should shop around and compare offers before you select a lender.
- Ask your lender to waive your appraisal. If you have a comfortable equity cushion and you're not taking cash out when you refinance, your lender may be able to waive your appraisal and rely instead on an automated valuation.
- Ask for a title policy discount. If you bought your home relatively recently, you may be able to pay a reduced fee to have your existing title policy reviewed and reissued.
- Ask for a streamlined refinance loan. If you have a government-backed mortgage loan and you want to refinance with the same type of loan, you may be eligible for a simplified, or "streamlined" refinance, which can involve lower closing costs. Three types of streamlined refinance loans are: