Breaking down the cost to refinance your mortgage

When you took out your first mortgage, life may have looked a little different. Maybe your interest rate was high, or your financial circumstances have changed since you bought your home. If you find yourself facing one of these situations (or something similar), you may be able to refinance your mortgage.

Refinancing your mortgage means replacing it with a new one. Although refinancing isn’t free, the cost to refinance can be made up for quickly by what you save in monthly payments and interest down the line.

Five reasons to refinance

Refinancing your mortgage is common in the world of homeownership, and there are different reasons why people do it.

• Market conditions have changed and you’re looking for a better interest rate.
• You’re looking to turn your FHA loan into a conventional loan. FHA loans require an upfront mortgage insurance premium that conventional loans don’t. Once you’ve built about 20 percent equity in your home, you might qualify to refinance into a conventional loan.
• You’re looking to change the type of interest rate on your loan. Mortgages come with fixed or adjustable rates. If you have a fixed rate, your interest is locked in for the life of your loan. If you have an adjustable rate, your interest rate resets each term, defined by you and your lender, and can go up or down based on market conditions.
• You want to use the equity you’ve built to cover other debts or expenses. This could be for a home renovation, or it could be to pay off other debts with higher interest rates.
• You’re looking to lengthen or shorten your mortgage term. You may have taken out a 15-year mortgage and realized you need more time to pay it off or you took out a 30-year mortgage and are looking to pay it off faster.

If your reasons for refinancing align with one of these five points, then moving forward with your decision could be right for you. Let’s discover the different ways in which you can refinance:

• Term refinance: A term refinance is a way to rework your loan into a shorter or longer term. If you’re looking to pay off your loan sooner and can afford an increase in your monthly payments, refinancing to a shorter term might be good for you. If you’re looking to increase cash flow you can refinance for a longer timeframe that results in lower monthly payments.
• Cash-out refinance: A cash-out refinance is when you borrow money against your home equity. This new loan will give you more than what you owe so you can use the extra money as cash on projects like a home renovation or to pay off high interest debt elsewhere.
• Interest rate refinance: There are a few ways to tackle an interest rate refinance. You may find that interest rates are lower now than they were when you first took out your mortgage. In this case, refinancing may get you a new loan with a better interest rate. If you’re looking to change your interest rate, you can also apply to switch from a fixed-rate mortgage to an adjustable-rate mortgage or vice versa. Adjustable-rate mortgages offer a lower interest rate for a set period, which can be a good option if you’re planning on moving soon. If you’re switching to a fixed rate, you may be able to lock in a lower interest rate that will remain the same for the life of your loan.
• Federal Housing Administration (FHA) loan to conventional loan: FHA loans require an upfront mortgage insurance premium that conventional loans don’t. Once you’ve built a minimum of 20 percent equity, you may qualify to switch to a conventional loan.

How much does it cost to refinance a mortgage?

Now that you know five reasons to refinance and the ways you can do it, you can anticipate what it might cost. As we mentioned earlier, you are responsible for closing costs and other fees during a refinance, just like you were when you took out your first mortgage. It varies by lender, but the overall cost ends up being about two to six percent of your loan amount. So, if you’re taking out a $200,000 loan, you may be looking at $4,000 to $12,000 in closing costs.

But what exactly makes up closing costs? Here are some that are likely to make an appearance:

• Loan application fee: What you pay to apply for your refinanced loan. Some lenders will refund this fee once everything is complete.
• Origination fee: This is a fee the lender charges to begin refinancing, and it ensures you’re serious about moving forward.
• Lender fees: This is what your lender charges for their services.
• Mortgage insurance: The type and cost of insurance will vary based on a few factors, including your loan type, credit score, home value and more.
• Property taxes: The price will vary depending on your home’s location, escrow balance and requirements of the loan servicer.
• Home appraisal: A professional appraiser will come and assess the value of your home based on objective data and subjective factors. This will help determine what the lender can do for you and can help you with your list price if you plan on selling in the near future. Appraisals are an appraiser’s opinion of value.
• Mortgage points: You can choose to buy mortgage points at closing for a reduced interest rate that can help save you money long term.

Refinance closing costs will vary depending on your lender, loan amount, loan type, credit score and more. With the help of our refinance calculator, you can get an estimate of how much your refinance may cost.

Things to look out for when refinancing

• Extending your loan term may cost you more money in the long run because you’re paying interest for a longer period.
• The cost of refinancing may counteract the savings.
• Make sure your new loan terms make both logistical and financial sense for your future plans as a homeowner.

Many homeowners look to refinance their mortgage in an attempt to lower their interest rate or utilize their home equity. Market conditions may have changed, or you’ve decided you’d like to pay off your loan sooner. Although there are different ways to refinance, you’ll find they all end with closing fees. Before moving forward, evaluate whether the cost to refinance is worth what you’ll have to pay during closing. If you decide a refinance is right for you, you can speak to a home lending advisor today.