If you’re thinking about refinancing your mortgage to lower your interest rate, you’ll have to pay a series of fees, which fall under the umbrella of “closing costs.” Those fees can add up to thousands of dollars. That doesn’t mean that you shouldn’t go ahead with your plans to refinance, but you need to understand how much it will cost so you can figure out if it’s worth it.
Fees That You’ll Have to Pay to Refinance
Your lender will charge you an origination fee to process your application. It may also require an appraisal to determine your home’s current market value and an inspection to make sure that the house’s condition meets the lender’s requirements. You’ll have to pay for title insurance to cover the lender in case it turns out that you don’t have valid ownership of the property for some reason.
If you have less than 20% equity, you’ll most likely have to pay for private mortgage insurance. If you decide to purchase discount points to lower your interest rate, you’ll have to pay a fee for them at closing.
The amounts charged vary from lender to lender. In some cases, you’ll be able to choose a company to provide a service, which can save you money. You may also be able to negotiate some fees with your lender.
How a No-Cost Refinance Works
If you choose a no-cost refinance, you won’t have to pay closing costs up front. Instead, the lender may charge you a higher interest or it may add the closing costs to your principal balance. A no-cost refinance can save you money at closing, but it can significantly increase the total amount you’ll have to pay over the life of the loan.
Weigh the Costs and Benefits of Refinancing
Your lender will provide you with a list of fees that you’ll have to pay at closing. When deciding whether to refinance and how to go about it, figure out when you would break even with a traditional and no-closing cost refinance.
To do that, divide the total you’d have to pay in closing costs by the amount you’d save each month by refinancing. That will tell you how many months it would take you to break even.
If you choose a traditional refinance and you stay in your home after you reach the breakeven point, the amount you’ll save will be more than the closing costs. A no-cost refinance can cost you thousands of dollars more over the full loan term. It may make sense if you plan to move relatively soon since you won’t have to pay for closing costs up front and you’ll be able to avoid paying a significantly larger amount over the long term.
