Refinancing your mortgage could be a wise financial decision if you can get a lower interest rate, more affordable monthly payments or reduce your term to pay off the balance faster. Still, it comes with costs that should be considered to determine if the benefits make refinancing worthwhile. However, before you conduct a cost-benefit analysis, you should understand how mortgage refinancing works.
Home Loans and Mortgage Refinancing
What is Mortgage Refinancing and How Does it Work?
A mortgage refinance enables you to change your current loan to a new one. Most borrowers take this route to secure a more competitive interest rate, lower monthly payments, borrow against the equity they’ve built up in the home or convert from an adjustable-rate mortgage to a fixed-rate mortgage.
How Much Does It Cost to Refinance Your Mortgage?
You’ll generally spend between two and six percent of your loan amount to refinance your mortgage. Here’s a breakdown of costs you can expect to incur:
- Application fee: $75 to $500
- Attorney fee: up to $1,000
- Credit report fee: $25 to $50
- Flood certification fee: $15 to $30
- Home appraisal fee: $300 to $500
- Home inspection fee: $300 to $500
- Loan origination and underwriting fee: up to 1.5% of the loan amount
- Title search and insurance fee: $400 to $900
- Recording fee: varies by location
- Survey fee: $150 to $500
Some Factors that Can Affect the Cost
The Size of Your Loan
The larger your home loan, the more you can expect to pay in closing costs.
Each lender has its own fee schedule for mortgage refinances, and some charge more than others.
The location of your property is a significant factor in how much you’ll pay for a home appraisal, property taxes and other applicable closing costs that come with refinancing your mortgage.
Your Credit Score
In most cases, the best interest rates go to borrowers with good or excellent credit scores. However, if your credit score isn’t up to par when you refinance, chances are you won’t get a lower rate unless market conditions have changed.
A shorter loan term will typically help you obtain a lower interest rate, which could save you thousands of dollars over time.
A traditional rate-and-term refinance will generally cost you less than a cash-out refinance as they pose less risk to the lender.
Fees and Other Charges
As mentioned, there are several fees you can expect when refinancing your mortgage. However, some lenders may waive a sizable portion of these costs to entice you to seal the deal.
Home Loans and Mortgage Refinancing
Why Should You Refinance Your Mortgage?
Lower Your Rate and Payment
Your credit score may have improved after taking your current mortgage; you could qualify for a lower interest rate. You could get more affordable monthly payments and possibly pay less interest over the loan term.
Request for an Adjustable Rate Mortgage
Adjustable-rate mortgages are generally more affordable in the first few years. But when the fixed period changes, you can expect your monthly payment to follow suit annually as market conditions change. Or you can refinance into a fixed-rate mortgage to get a predictable monthly payment that doesn’t change over time.
Shorten Your Term-loan
If you don’t mind higher monthly mortgage payments, you could shorten your loan term to pay your mortgage off faster. As a result, you may get a lower interest rate and save several hundred or thousands of dollars on interest over the loan term.
Take Cash out to Consolidate Your Debt
You can also get cash out of your home through a cash-out refinance to consolidate high-interest debts and free up room in your budget to meet other important financial goals.
Take Cash out for Home Improvements
Home upgrades and repairs can be pricey. But if you use a cash-out refinance, you can cover the costs without resorting to a high-interest credit card or personal loan with steep monthly payments.
Take Cash out to Purchase Investment Property
You can use the loan proceeds from a cash-out refinance to purchase or put a down payment on an investment property and make your money work harder for you.
Remove Private Mortgage Insurance
If your loan-to-value ratio is below 80 percent after refinancing, you may be able to remove private mortgage insurance.
Where Can You Refinance Your Mortgage?
You can refinance your mortgage through a bank, credit union or online lender. But if you want a seamless experience, consider loanDepot, as they offer flexible solutions and exceptional customer service to help you refinance with confidence.
Whether you want to get a lower APR, more affordable monthly payment or pull cash out of your home, a Licensed Lending officer from the loanDepot team can review options with you to help you make an informed decision. Even better, you’ll be one step closer to meeting your financial goals.
Submit an online inquiry today to connect with loanDepot and explore mortgage refinance offers.