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Considering Refinancing Your Mortgage?

Refinancing your mortgage can save you hundreds each month, but it’s important to consider all the costs involved—and whether it will actually save you money in the future.

Refinancing your mortgage can come with many benefits, but there are costs that you need to be aware of—so you know you’re making a move that will actually save you money. Mortgage interest rates hit a historic low last year, leaving a record-setting 19 million homeowners eligible for refinancing, according to homeownership data and analytics company, Black Knight. The report estimated average savings to be $300 per month after refinancing.

Though interest rates have increased in 2021 (the current interest rate for a 30-year fixed mortgage is about 3 percent, according to FreddieMac), there a few government-backed mortgage relief programs that eligible homeowners could benefit from, such as being able to refinance your home loan after forbearance. Those eligible can refinance their mortgage as early as three months after ending a forbearance plan, according to Mortgage Reports. Interest rates tend to fluctuate quite a bit, so if you’re ready to refinance your mortgage, start your research today to get the best possible interest rate.

“It may be the right time to refinance if you’d like to reduce your current mortgage rate, reduce your monthly payment, cash out on rising equity, shorten your term to pay off your home loan early, or even consolidate large amounts of debt,” says Andrina Valdes, COO of Cornerstone Home Lending, Inc. Refinancing your mortgage can potentially save you hundreds of dollars per month, but knowing the total costs involved—and how they might impact your money in the long run—can help you decide if it’s the right move for you. Here are the costs to expect when refinancing your mortgage, according to real estate experts.

Closing costs are usually 2 to 5 percent of your loan amount
The average cost to refinance your your mortgage is generally 2 to 5 percent of the remaining amount left on your loan. It also depends on where you live.

“If you live in a relatively rural location with low property rates, you’re going to pay less than someone living among million-dollar homes,” says Cliff Auerswald, president of All Reverse Mortgage. While the amount varies based on location and loan amount, the average closing cost of refinancing your mortgage is about $5,000 according to Freddie Mac.

“For example, you can expect your closing costs to be around $2,000 to $6,000 for a $100,000 mortgage refinance,” says Leonard Ang, GEO of iPropertyManagement, an online guide for real estate investors, landlords, and tenants. You can use this mortgage refinance calculator by Freddie Mac as a starting point to calculate your estimated refinancing costs.

Fees for the application, credit check, and appraisal add to the total cost of refinancing your mortgage
Additional fees for things such as the application, credit reports, home appraisal, and title searches can add to your closing costs. These costs can range from a few hundred dollars to a few thousand depending on the lender and factors such as the area you live in and your home inspection.

“Application fees cover the cost of the refinance process, including checking your credit report,” says Auerswald. He says the application fees generally range from $50 to $300, and you will have to pay them whether you are approved or denied.

Other fees you could be asked to pay are prepayment penalties, which are one to six months of interest payments. Auerswald says you could have higher prepayment penalties based on your payment history, but if you have made your mortgage payments on time each month, you might be able to lower the amount. “Prepayment penalties are a lender’s way of discouraging you from ending your current loan early,” he says.

Title search and insurance can be the most expensive, costing around $600 to $1,000, says Auerswald. Title service fees have to do with getting a title insurance policy for your lender, protecting them in case there is a problem with the title to the home, such as a legal claim. The process can be long.

“You can save your lender some time by digging up your past title search,” suggests Auerswald. “Although there may be some changes, it’ll make the process go much faster.”

Many of these fees will depend on your lender, so be sure to do your research and look at a few different lenders to see who might give you the best deal. “Some closing costs are static, but fees for application, underwriting, and processing may vary by lender,” says Valdes. “Shopping around could help you find lower upfront fees, and you could use this information to negotiate with your current mortgage lender,” she explains.

You can refinance your mortgage with no closing costs, but it could cost you more in the long run
Refinancing your mortgage without any closing costs is called a no-closing-cost refinance. While it is an option, carefully look at the numbers to see whether it will actually save you money—you might just end up paying the same amount, or more.

“Instead of paying for closing costs at the closing table, your closing costs will be lumped into your new loan or be compensated for in agreeing to a higher mortgage rate,” says Valdes. She suggests negotiating with your lender regarding their fees instead of opting for a no-closing-costs deal.

It might also be challenging to find a lender that provides this option. “It takes good market research to find a lender that offers such services,” says Jeff Johnson, a real estate agent and acquisition manager of Simple Homebuyers. Even if you do find the right lender, not paying any closing costs while refinancing is unlikely to save you money down the line, because you end up paying more interest. “You save almost no money even after refinancing without closing costs,” Johnson continues.

Calculating your total refinance amount, comparing lenders, and thinking about how long you plan on living in your home are all factors to consider before refinancing your mortgage—so you can be sure it’s a decision that makes sense for your short-term and long-term financial goals.

Hiranmayi Srinivasan, Real Simple