With interest rates at record lows , the odds are that you’ve at least considered refinancing your mortgage. However, this can be an intimidating and costly process if you don’t know what you’re doing. Thankfully, we have created this handy guide to mortgage refinancing that will help you truly maximize your money.
Mortgage refinancing is when you take out a new mortgage loan to replace your current mortgage loan -- all while staying in the same house. While this might seem totally unnecessary, there are actually a lot of potential benefits you should know about. For example, mortgage refinancing may provide you with a lower interest rate which can save you a ton of money throughout the term of your loan and leave you with lower monthly payments. Interest rates are at historic lows right now, averaging just over 3% for a 30-year fixed-rate loan, so many homeowners are rightly considering refinancing to get a lower interest rate. Mortgage refinancing also provides you with the opportunity to change the type of term of your loan so you can save money or potentially pay off your loan quicker.
The mortgage refinancing process is largely similar to the loan process you went through when you were initially buying your home. Here are the steps to expect in this process:
- Shopping: You should always shop around with different lenders to secure the best interest rates and terms for your loan.
- Applying: From there, you complete your application and provide all the documentation necessary, including pay stubs, W-2s, and bank statements. The lender will also pull your credit report.
- Locking in your rate: After your application has been approved, you can lock in your interest rate so that it doesn’t change while the loan is being processed and finalized. Lenders generally allow you to lock your interest rate for 30 to 60 days.
- Underwriting: During the underwriting process, the lender will analyze all of your documentation to ensure that it’s complete and accurate.
- Home appraisal: Since you are technically applying for a new loan, you will have to get another home appraisal. For the best possible results, make sure that your home is in tip-top shape beforehand. It may also help to provide the appraiser with a list of repairs and improvements that you’ve made to the home since you bought it. So long as the appraisal value is equal to or higher than the requested loan amount, you’re all set to close.
- Closing: Closing is the final step after the underwriting and appraisal have been completed. At closing, you’re provided with the final numbers and details of your loan before you sign on the dotted line. This is also when you pay any additional closing costs that weren’t yet paid during the process.
While the cost of refinancing your mortgage loan will vary, you can expect to pay a total of 2 to 5% of the total value of your new loan. For example, if your new loan is for $250,000, you can expect to pay between $5,000 and $12,500 in closing costs. Obviously, this is a big gap -- so what factors can affect the cost of refinancing your mortgage?
- Some lenders charge more fees than others. Shop around for the best rates and find the best savings.
- Lenders will charge you prorated mortgage interest from your closing date to the first day of the next month. Lower interest rates will save you on this cost.
- Location can affect the cost of your mortgage refinancing due to things like prepaid property taxes and insurance.
- Lender credits can be used to eliminate some fee components of refinancing, but these credits often come at a cost that can, in turn, increase your interest rate and cause you to pay more in the long term.
Getting a list of fees and not knowing what they are or why you’re being charged can be totally frustrating. And while some of these costs can be avoided or eliminated, some simply come with the territory of refinancing. Here are some of the closing costs you can expect to pay when refinancing your mortgage:
- Loan origination fee: If you’re overwhelmed by all the paperwork required to refinance, just remember that your lender is the one who actually processes all of that paperwork and charges a fee as a result. This fee covers the cost of running your credit report and may also be referred to as an administration fee, application fee, underwriting fee, or document preparation fee. The loan origination fee typically amounts to 1 to 1.5% of the loan amount.
- Discount points: Discount points involve prepaying parts of your loan upfront in order to lower your interest rate and monthly payment. While using discount points is totally optional, it may be a good idea if you have extra money saved. Think of it as an investment!
- Early repayment fee: Some lenders may charge you an early repayment fee if your refinancing will result in you paying off your mortgage ahead of schedule. While this fee isn’t very common, it could be discharged if you refinance during the first three to five years of your mortgage.
- Appraisal and inspection fees: In order to know the true value of your house, you’re going to need an appraisal which typically costs between $300 and $500. In addition, your lender may require additional inspections that will cost you about the same amount.
- Mortgage and title insurance fees: If your loan is backed by the federal government, you will need to pay mortgage insurance. If you put down less than 20% of the value of your mortgage, you will need to pay private mortgage insurance (PMI) until that 20% is reached. Title insurance protects you from errors during the title process that could leave you on the hook for any existing liens or other issues with the property.
As you can see, there are a lot of fees to keep up with, and they can add up fast. While $250 for each fee might not seem like a lot at first when you’re refinancing, multiplying that amount by ten different fee categories can end up costing you thousands of dollars. As a result, it’s always a good idea to estimate your refinancing costs before you begin the process to get an idea of whether or not it makes financial sense. That being said, while refinancing your mortgage will cost you some money, there are things you can do to save money:
- While it looks appealing to seemingly save on all these closing costs by going with a “no closing cost” loan, it’s important to understand what that really means. Some lenders offer refinancing with “no closing costs,” but instead of paying these costs upfront, they are covered in the loan itself through a higher interest rate. Other lenders offer refinancing that allows you to include closing costs in the amount of your new mortgage. Both of these scenarios will lead to you paying more in interest in the long run. As a result, we definitely recommend that you avoid these options to maximize your money. If you’re having trouble covering your closing costs, you could consider things like a personal loan or even a home equity loan from a lender like Seek Capital .
- Improving your credit score before you go through the refinancing process can save you a ton of money in the long run since interest rates are largely tied to your credit score. If you aren’t quite where you want to be in terms of your credit score, exercise diligence when it comes to paying off your bills and not spending too much on your credit cards.
- Many people only consider refinancing with their current mortgage lender, and while that may seem like a simple and straightforward option, you should also look elsewhere. It’s recommended that you research at least three different lenders to ensure that you get the best rate. At the same time, you don’t want to check out too many different lenders as many of them will run your credit report -- potentially decreasing your score as a result.
Mortgage refinancing can be extremely worthwhile if you do it correctly. That being said, the fees and closing costs associated with refinancing can often deter homeowners from going through this process. If you aren’t sure how to cover the closing costs of your mortgage refinancing, lenders like Seek Capital may be able to help. Sources: https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-3-18-21/ https://time.com/nextadvisor/mortgages/how-to-find-the-best-mortgage-lender/ https://www.cnbc.com/select/easy-tips-to-help-raise-your-credit-score/
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