When you refinance your mortgage, you’re essentially switching from an old loan to a new home loan. And that comes at a cost.
You’ll want to decide whether interest rates have dropped enough to make the costs of the mortgage refinancing worthwhile and whether you’ll be staying in the home long enough to recover those costs — and save money on interest payments.
Some homeowners might want a cash-out refinance, which means they’re using their home equity to take cash out for a major expense such as renovations or college tuition. Be aware that each state likely has different rules about cash-out refinancing.
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It used to be that people didn’t refinance unless mortgage rates had dropped to a lower rate of at least 1 percentage point. But nowadays it’s fairly common to begin a mortgage refinance if the rate has dropped by at least a half a percentage point from your current, higher interest rate.
The good news about refinancing is that lenders often let a homeowner transfer mortgage origination costs into the new loan so they aren’t paying them out of pocket.
“Closing costs can be rolled into the loan if you have enough equity,” says Pamela Anderson, senior loan officer at Cherry Creek Mortgage Co., “but you also will have the option to bring the amount to closing.”
Closing costs can vary, she says, so make sure you receive a full estimate before signing on the dotted line.
In a refinance, you won’t have a seller picking up any of the closing costs, so that’s something to be aware of, says Matt Authier, a loan originator with Gateway Mortgage Group.
Here’s a look at what it costs to refinance to a new mortgage and a rough estimate of what each part of the process costs.
Title Search, Title Policy, Escrow Fees and Escrow Deposit
The title fee goes to the title company that researches the title and makes sure no one else has a claim on the property. It can be $200 or more. The escrow fee, about $300 or so, goes to an escrow company — a third party that makes sure all parties in the transaction get paid what they’re owed.
You might be required to make an “escrow deposit” that might include prorated interest charges, homeowner’s insurance, and property taxes.
Because you’re already in the home and had a previous title search and title insurance policy, the title company might give you a break on what it charges for a refinance compared with what you paid when you first bought the home.
The lender, such as a mortgage company, bank or credit union, will assess some fees. These can include a loan origination fee (typically 1% to 3% of the loan amount) and an application fee (which sometimes is waived).
Attorney’s Fees, Document Preparation and Recording Fees
These fees, typically about $150 to $300, include some required disclosure forms such a closing disclosure — a form that provides details about the mortgage loan you’ve selected, according to the Consumer Financial Protection Bureau. The closing disclosure includes the loan terms, your projected monthly payments through the life of the loan, and how much you’ll pay in fees and other costs to get your mortgage.
Waiver on Some Fees
Certain lenders might waive the need for an appraisal or survey on a refinance, which will save you some dough: An appraisal can cost $450 or more. If a survey was done when you bought the home (that’s highly likely), you also might be able to submit the existing survey and avoid the expense.