We’ve written before about using the equity in your home to improve your financial situation through cash out refinancing, equity lines of credit, and the like. But even if you have no intention of drawing down on that equity, refinancing a mortgage can improve your overall financial health. But before you get started on that process, you should have an understanding of the average cost to refinance.
While it may not feel like a normal real estate transaction (after all, you’re not going anywhere), the fact of the matter is that refinancing your mortgage creates a new loan which carries with it the same approval processes and origination fees that you would pay if you were buying a new house. The average cost to refinance is far lower than what you would be paying if you were selling a home because there are no agent commissions, but you should still plan on paying 2-3% of the value of the loan in assorted fees.
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Let’s begin with a few reasons why you’d want to refinance when you’re not planning on withdrawing any home equity.
Accelerating your repayment – If the loan on your home is more than a few years old, the odds are high that you’ve built up significant additional equity just due to the current real estate market. You may be able to refinance from a typical 30-year fixed mortgage into a shorter-term 15-year fixed. If you’re planning on staying in your home this can offer significant savings on your total interest payments over the life of the loan and justify paying the average cost to refinance.
Extending the life of your mortgage – If, on the other hand, you find yourself struggling each month to make your mortgage payments, using today’s low rates to refinance into a new 30-year fixed mortgage may afford you some additional breathing room. The reason for this is twofold: First, rates are still very near all-time lows, which may save on monthly payments even if your existing loan is relatively new. Second, increased equity may allow a lender to extend your principal repayment over a new longer term because more equity reduces the risk to lenders.
Lower rates or getting rid of PMI – If you were unable to put down 20% when you originally purchased your home, odds are you’re currently paying private mortgage insurance. If the growth of property prices means you now have more than 20% equity in your home, you may be able to refinance to a new loan that doesn’t require you to pay for PMI. If you’re not paying PMI, a refinance could still allow you to lower your rates (you should only plan on doing this if you’ll be in your home for a few years and can save at least 0.50-0.75% at minimum).
What Does the Average Cost to Refinance Pay for?
As mentioned above, the average cost to refinance is typically 2-3% of the value of the loan and typically includes the following fees:
Appraisal – Your lender will want to have the property appraised to get an independent valuation of the home and you can typically expect to pay around $500. The biggest factor in an appraisal is the comparison to other recent sales in your area, which are frequently referred to as “comps.” However, taking steps to make sure your home is well-maintained and performing necessary maintenance can influence the appraised value. In the event that the appraisal is well short of expectations, you may be able to conduct a second or even third appraisal if necessary.
Application fee – These fees vary widely by lender and can be avoided by shopping around. However, the application fees are typically small relative to other costs, so be willing to pay them if that lender is offering lower mortgage rates.
Attorney and title fees – Requirements for title searches and the use of an attorney vary by state and lender. If your state requires that an attorney reviews and files your lending documents, there’s no getting away from this one.
Origination fees – Origination fees make up a big chunk of the average cost to refinance, but there is some good news. These fees are negotiable, so don’t be afraid to bring it up with your lender. If you’re refinancing a large loan, you’ll have more leverage.
These are just examples of the fees that comprise the average cost to refinance a mortgage, and you should speak with a lender about fees before you begin the application process as some, like the application fee, are assessed even if they decline your loan.
Have you recently refinanced, or are you planning on refinancing to take advantage of the low rates?