Refinancing your mortgage might help you lower your monthly payments and save tens of thousands of dollars in interest over the life of the loan. A refinance typically comes with closing costs, a series of fees that can cost thousands of dollars up front. You might be able to keep your closing costs down or avoid them altogether, but you need to be careful to avoid paying more later.
Ways to Lower Closing Costs
Your lender may charge a loan application fee. Some lenders require payment up front, while others waive the fee if an application is approved. Lenders also charge fees to originate or underwrite a loan and to pull credit reports. In addition, they often require an appraisal to determine a property’s current market value. A lender may be willing to reduce or waive some of these fees if you have a good credit score and a significant amount of equity. It can’t hurt to ask.
The lender will require title insurance in case any ownership-related issues arise during the mortgage term. Your original lender most likely required you to purchase title insurance when you bought the house. If you stick with the same title insurance company when you refinance, you may qualify for a reissue rate. It could be lower than the rate you would pay if you bought a new title insurance policy with a different company.
Pros and Cons of a No-Closing-Cost Refinance
Some lenders allow homeowners to refinance without paying any money up front. That may sound appealing, but financial institutions need to make money somehow. A lender might charge you a higher interest rate or add the fees to the principal balance. With a no-closing-cost refinance, you might save money at the beginning, but you could expect to make higher monthly payments and to pay more in interest over the term of the mortgage than you would have if you had paid the closing costs up front.
A no-closing-cost refinance might make sense if you couldn’t afford to pay the closing costs, but refinancing would significantly lower your interest rate and monthly payments. It might also be a good idea if you plan to sell your home in the not-too-distant future. If you were to pay closing costs when you refinanced, it could take you several years to save enough through lower monthly payments to recoup the amount you paid at closing and break even. If you know you’ll move before the break-even point, avoiding closing costs can be a smart move.
Look for Ways to Keep Closing Costs in Check
Lenders charge several fees for a refinance. The amounts of those fees vary from one company to another. You may be able to shop around for a competitive rate in some cases, and a lender may even be willing to waive other fees. Your lender will send you a loan estimate explaining all the fees. Go through it carefully, line by line, to look for ways to save money at closing.
