Who pays closing costs when refinancing?
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.
Homeowners typically refinance to save money, often resulting in a lower interest rate and monthly payment that can save you thousands over the life of your loan. However, it's not usually free. The process involves paying refinance closing costs, which average between 2% and 5% of the loan amount.
Closing cost | Amount |
---|---|
Loan origination or underwriting fee | Up to 1.5% of the loan principal |
Application/credit report fee | $75 to $500 |
Appraisal fee | $300 to $700 |
Survey fee | $150 to $400 |
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.
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
Common fees that contribute to the closing costs include, but are not necessarily limited to, appraisal and inspection fees, application fees, origination fees, mortgage and title insurance fees, early repayment fees and discount points — some of which are more avoidable than others.
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.
The cost to refinance a mortgage is usually around 2% to 6% of the loan amount. That's about the same as closing costs for a home purchase. The big difference is that a down payment isn't necessary when you refinance because borrowers already have equity in their home.
Refinancing can increase your mortgage costs if you haven't built up sufficient equity in your home. Generally, when you have less than 20% equity value the lender will require you to pay private mortgage insurance premiums. This insurance is a protection for the lender against the possibility of default.
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).
What do you lose when you refinance?
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
- Closing costs. To begin with, refinancing loans have closing costs just like a regular mortgage. ...
- You may end up in more debt. You also need to have a clear idea of how you'll use the money you free up when you refinance. ...
- A slight dip in your credit score.
As a rule of thumb, experts often say that it's not usually worth it to refinance unless your interest rate drops by at least 0.5% to 1%. But that may not be true for everyone. Refinancing for a 0.25% lower rate could be worth it if: You are switching from an adjustable-rate mortgage to a fixed-rate mortgage.
Refinancing your mortgage does not have to negatively impact your home equity. Just the opposite, in fact: The goal of a refi generally is to get a new loan with lower interest rates, making repayments easier and allowing you to build equity faster.
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you'll likely need 20% equity in your home. This number is often the amount of equity you'll need if you want to do a cash-out refinance, too.
Apply Through Your Lender
After you get approved, your lender will walk you through the next steps toward closing. After closing, all that's left to do is wait a few days for your check to arrive. The entire cash-out refinancing process can take 30 – 60 days from start to finish.
You can refinance as often as you like, as long as it makes financial sense (and you meet the lender's seasoning requirement). If your goal of refinancing is to save money, you'll want to consider the closing costs in comparison to your potential savings.
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.
Rolling closing costs into the loan might be worth it if you're not paying too much extra interest. This is especially true with a refinance that gives you a lower monthly payment.
But while the Fed raised its benchmark rate fast in 2022–2023, it's expected to bring rates down at a much more gradual pace in 2024 and beyond.
Why is refinancing so difficult?
Your lender may disqualify you from refinancing your mortgage if you carry too much debt. Your debt-to-income ratio must meet your lender's thresholds for you to qualify. Having a low credit score may also prevent mortgage lenders from approving your application.
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.
If rates are lower, or you think your credit rating may qualify you for a better interest rate than you received when you first got your mortgage, you may consider refinancing. A refinance is essentially getting a new mortgage to replace the one you currently have.
For example, you might refinance to secure a lower interest rate, adjust the term length on your original mortgage or switch the type of loan that you have. One of the primary benefits of refinancing is the ability to reduce your interest rate.
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
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