If you’re thinking about refinancing your mortgage, typically the main consideration is the interest rate. Maybe interest rates have fallen since your loan was first approved and funded, so getting a lower rate may make sense to save on interest. Other valid reasons to refinance might be to get out of the uncertainty of an adjustable rate mortgage and into the stability of a fixed rate mortgage. Or, you might decide to refinance to a different term and change the monthly payment amount. Whatever the motivation to refinance, there will be some costs to refinance your mortgage. Understanding the costs of refinancing will help you make the best possible plans.
What Are the Costs to Refinance Your Mortgage?
Look at Your Initial Mortgage Agreement
The easiest way to see the costs to refinance your mortgage is to look at your initial agreement when you first bought and financed your home. You will see lender fees and non-lender fees. For example, you may have paid a loan processing fee or underwriting fee. You also paid for an appraisal and credit report. Non-lender fees were also present in the form of title insurance, settlement services and other charges. When refinancing, you’ll see most if not all of these same refinancing costs, and these can help you decide whether or not mortgage refinancing makes sense. Lowering your monthly payment is just part of the equation, the other is how much it costs you to do so. However, it is possible to refinance with no extra costs. Be sure to read the No Cost Refinancing section below to learn more.
Closing Costs and Your New Loan Amount
Closing costs are handled differently when refinancing, and this is one of the costs of refinancing you’ll have to pay more attention to this time around. When refinancing, you will have the ability to roll those closing costs into your loan amount. There are certain loan-to-value considerations with different loan types but in general, rolling closing costs into the new loan is the standard. Still, though you may not have to come to the closing table with cash to pay for closing costs, you will increase your loan balance by the amount of those fees, increasing your monthly payment.
Closing Costs and Interest Rates
Another way to address closing costs is to have your lender adjust your interest rate upward by a small amount and credit your closing costs. How does that work? You may recall that when you select the right loan program, you then also select an interest rate to go along with your new loan. You’re given the option of paying discount points to get a lower rate. A discount point is so-called because it lowers your rate and is expressed as a percentage of the amount borrowed. How much your rate is discounted varies, but on a standard 30-year fixed rate loan, paying one point—or 1% of your loan amount—your rate will be lowered by around 0.25%. You can work with your loan officer to compare the trade-off of paying more to lower your rate or not paying any points, called a “par” rate by your lender. If you decide to pay a point, that point may also be rolled into your loan amount.
Conversely by increasing your interest rate by 0.25% from the par rate, your lender can provide you with a credit of around 1% of your loan amount. For a $200,000 loan and you decide to take a slightly higher rate, your lender can provide you with a $2,000 credit at closing.
No Cost Refinancing
But what about these “no cost” mortgages you hear about? If all loans require specific third party services before the loan can be approved, how are they compensated? In a similar fashion that you raise your rate in order to get a credit, you may be able to adjust your rate to cover most, if not all, of your costs entirely. This is how a no-cost loan works. Instead of paying the costs of refinancing up front, you pay them in more manageable chunks throughout the life of the loan. Not every lender offers this option, but Homesite Mortgage specializes in this type of refinance. Visit our Learning Center page on our website for some important pointers on how to shop for a lender.
This means it’s important to shop around for the most competitive rate but also the fees. You can get a rate quote along with a loan estimate which can highlight the types of fees you can expect at the settlement table along with another rate used to offset part or all of your closing costs. Not all lenders however offer such a program. Give us a call, let us know what your goals are, and we can craft a no-cost mortgage designed for your situation.