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How Much Will It Cost To Refinance Your Mortgage?

5-Minute Read
Published on September 21, 2020
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There are many good reasons to refinance with today's low interest rates. When interest rates are low, many homeowners ask themselves, "Should I refinance?" wondering specifically if the savings of a refinance are worth the costs. To help you decide if refinancing is right for you, this article will discuss the cost to refinance, as well as if it’s a good idea to refinance your home.

The Costs Of Refinancing

Refinancing means getting a new mortgage. Because a homeowner is taking out a new mortgage, the closing costs associated with a refinance are similar to taking out the first mortgage. The main difference in closing costs is that with a refinance, home inspections are not required. 

In general, refinance costs are generally about 2 – 3% of the mortgage amount. If you want more specific information about what you can expect to pay in closing costs, be sure to use the refinancing calculator.

There are many fees included under the 'closing costs' umbrella. The following are some of the most common fees you might find in your closing costs:

Refinancing Fee

Cost

Loan Application Fee

Up to $500

Loan Origination Fee

Up to 1.5% of the loan amount

Credit Report Fee

Up to $50

Home Appraisal Fee

Up to $400

Home Inspection Fee

Up to $500

Title Search Fee

Up to $900

Recording Fee

Up to $250

Reconveyance Fee

Up to $65

Flood Certification Fee

Up to $25

Refinance Guide

Learn how refinancing can help you save money.

Read the Refinance Guide

Reasons It May Be Worth The Cost To Refinance

While the costs above can add up quickly, there are plenty of benefits to refinancing that can outweigh the costs. The following are a few reasons that it might be worth the upfront cost for you to refinance your home.

Lower Your Monthly Payments

Interest rates are currently at historic lows. Therefore, if you choose to refinance now, you could pay significantly less on your fixed-rate mortgage than ever before.

For example, if you had taken out a 15-year fixed-rate, $200,000 mortgage issued in 2000 with the then-average interest rate of 7.71%, it would cost you $1,878 per month, and you would pay $338,040 over the life of the loan. If you took on the same loan today, but with today's interest rate of 2.87%, the monthly payments would cost $1,369, and you'd pay $246,420 over the life of the loan. Today's interest rates can save you tens of thousands of dollars over the life of your loan.

If you decide to leverage the current low interest rates and refinance now, there is also a strong chance that you have built equity in your home. If you own at least 20% of your home, you will get rid of PMI or the private mortgage insurance required if you have a conventional loan, saving you tens or hundreds of dollars per month. 

Change Your Term

Today's lower interest rates may make a shorter loan term mortgage affordable, significantly, if your income has increased since you applied for your first mortgage. For example, if you are 10 years into a 30-year fixed-rate mortgage, you may now be able to comfortably switch to a 15-year fixed-rate mortgage.

Alternatively, if you’re having difficulty making your monthly payments, it might make sense to lengthen your loan term. For example, if you’re 15 years into a 30-year fixed-rate mortgage, you may choose to refinance your mortgage's remainder into a 20-year fixed-rate loan. While this may increase the amount that you pay over the mortgage's life, it can be the difference between barely having the money to pay your mortgage every month and being able to live more comfortably.

Consolidate Debts

There are several benefits to leveraging a mortgage refinance to consolidate your consumer debt. You can both significantly lower the interest rates that you're paying on your debt and leverage tax deductibility.

If you have several high-interest loans as well as have some equity in your home, you may be able to refinance your mortgage to pay off the high-interest loans. For example, let's say that you have $150,000 of equity in your $300,000 home, but have a $20,000 auto loan at 5% interest and $15,000 in credit card debt at 16%. You may be able to take out a $185,000 refinance at a much lower interest rate to pay off your debts and leverage the current interest rate of 3% or less.

Additionally, you may also want to see if the 2017 Tax Reform will affect you, especially if you live in a high tax state. If this is the case, you may be able to write off all or a portion of your mortgage interest on your taxes, thus saving you even more money by consolidating your debts.

Cash-Out Refinance

Homeowners may want to tap some of their equity to undertake a home improvement project or pay for college tuition. A refinance allows homeowners to access the equity in their homes to pay for projects and other expenses upfront. They can then make additional payments on their mortgages rather than take out a hard cash or credit card loan to pay for these expenses.

You've Decided To Refinance. Now What?

If you've decided to refinance, then it is time to prepare for the paperwork necessary. Most of the documents that you needed for your first mortgage will once again be required for a refinance, including tax returns, W-2s, and pay stubs. If you are self-employed or receiving alimony or child support, you may have to provide additional documentation. 

If you are working with a specific lender, your mortgage broker will help you understand which documents you need and communicate a timeline. You will be working with this person for several weeks, so be sure to choose a mortgage lender that you both trust and enjoy working with.

Summary: A Short-Term Cost For Long-Term Savings

A refinance might not be for everyone. However, today's historically low interest rates make a mortgage refinance more accessible and practical for more people. Therefore, the upfront costs of refinancing have a high chance of paying for themselves relatively quickly.

If you have further questions regarding a mortgage refinance, you can explore more about refinancing your home in our Refinance Guide.