How can I avoid closing costs on a refinance?
You can choose between two different options with a no-closing-cost refinance: either an increased interest percentage or a higher loan balance. Not every lender offers both types of no-closing-cost refinances, so make sure your lender can offer you the option you want.
In a no-closing-cost refinance, the borrower doesn't pay for these expenses upfront, but rather over time. This could be by one of two methods: The closing costs are rolled into the new loan, increasing the balance; or you'll pay a higher interest rate. Many lenders offer no-closing-cost refinances.
However, the lender isn't going to offer you discounts if you don't ask for them. To potentially reduce some of the closing costs of a refinance, ask for closing costs to be waived. The bank or mortgage lender may be willing to waive some of the fees, or even pay them for you, to keep you as a customer.
Why does refinancing cost so much? Closing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third-party fees. Refinancing involves taking out a new loan to replace your old one, so you'll repay many mortgage-related fees.
Refinance Your Mortgage
Refinancing a mortgage means replacing your mortgage with a new one. Homeowners refinance to secure better rates and terms for their loans. So, you can use a no-closing-cost mortgage to purchase your home, meaning you don't pay any closing costs upfront.
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The average closing costs on a refinance are approximately $5,000, but the size of your loan and the state and county where you live will play big roles in how much you pay.
You May Get a Better Interest Rate
Shopping around is one of the best ways to make sure you're getting the best interest rate on your new loan, and if you stick with your current lender who knows what your current rate is, you might get a lower rate but not the best out there.
State | Average closing costs with taxes | Average closing costs without taxes |
---|---|---|
California | $5,762 | $2,829 |
Colorado | $2,266 | $2,235 |
Connecticut | $2,678 | $2,678 |
Washington, DC | $3,370 | $3,370 |
Borrowers who roll closing costs into a mortgage spend less money out of pocket and keep more cash in hand. That's a big argument in favor of rolling in closing costs. However, you are also paying interest on those costs over the life of the loan.
A rule of thumb says that you'll benefit from refinancing if the new rate is at least 1% lower than the rate you have. More to the point, consider whether the monthly savings is enough to make a positive change in your life, or whether the overall savings over the life of the loan will benefit you substantially.
Are mortgage rates going down in 2024?
The March Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6.7% during the first quarter of 2024, falling to 6.4% by year-end. This reflects an upward revision in Fannie's analysis: Just last month, the mortgage giant expected rates would dip below 6% at the end of this year.
Real Estate Taxes
If the real estate tax bill that comes with your property is higher than what you and your lender originally estimated, then your closing costs will be higher as a result. One possible reason that a house would have a higher tax bill is if it is assessed at a higher amount than your contract price.
For example, when refinancing your mortgage, there will be closing costs to be paid as part of the process. If you opt to have the closing costs rolled into the new mortgage, you're augmenting the mortgage balance — the amount you owe — and thus diluting your equity — the amount you own.
Sadly, mortgage lenders typically don't accept credit cards and require that you either wire the money or pay with a cashier's check. On the bright side, you might be able to use your credit card for those costs you pay before the actual closing date, such as home inspection fees.
Your cash to close and closing costs are interconnected but are still different. Closing costs refer to the fees you pay to your mortgage company to close on your home loan. The cash to close is the total amount – including closing costs – that you'll need to bring to your closing to complete your home purchase.
Although you can haggle some closing costs and fees, many of the fees charged by the government cannot be negotiated. These may include an upfront FHA mortgage loan fee, VA funding fee and USDA mortgage insurance fees.
Product | Interest Rate | APR |
---|---|---|
30-year fixed-rate | 7.227% | 7.308% |
20-year fixed-rate | 7.091% | 7.198% |
15-year fixed-rate | 6.366% | 6.500% |
10-year fixed-rate | 6.053% | 6.247% |
Legally speaking, there's no limit to how many times you can refinance your mortgage, so you can refinance as often as it makes financial sense for you. Depending on your lender and the type of loan, though, you might encounter a waiting period — also called a seasoning requirement.
Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
Another option might be a home equity line of credit (HELOC). Shop rates and compare closing costs: Home equity loan rates are typically higher than mortgage rates, but often have lower closing costs than a refinance loan.
At what interest rate difference should you refinance?
As a rule of thumb, it's usually worth it to refinance if you could lower your current rate by one percent. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
In simple terms, yes – you can roll closing costs into your mortgage, but not all lenders allow you to, and the rules can vary depending on the type of mortgage you're getting. If you choose to roll your closing costs into your mortgage, you'll have to pay interest on those costs over the life of your loan.
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).
If you roll your closing costs into your loan, you pay interest on them. Pay them upfront, and you don't, which keeps your monthly payment lower. On the other hand, if money is tight and you're already spending a lot of your savings on a down payment, you may be better off rolling closing costs into your loan.
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