How much does it cost to refinance?

Rising costs could mean you’re looking for creative ways to save. A mortgage payment is the biggest monthly expense for most Americans, so any reduction in this payment could have a big impact on your budget.

One way to save is through refinancing, or paying off your current mortgage by taking out another mortgage. Refinancing your existing mortgage loan could help you lower your monthly payment, but it also comes with closing costs (about 2% to 6% of the loan amount) that could prevent it from being a good option for everyone.

What does it cost to refinance?

There are costs associated with refinancing. Like a purchase mortgage loan, refinancing also comes with closing costs, which can account for 2% to 6% of the loan principal. On a $200,000 mortgage, you could pay between $4,000 and $10,000 in closing costs alone.

Closing costs can include fees for the application, credit report, title search, and home appraisal. You may also pay a portion of the private mortgage premium (PMI) upfront if you don’t have at least 20% equity (although most opt to pay PMI in monthly installments). Premiums typically are 0.5% to 1% of the loan amount each year.

If you pay part of the premium at closing, your lender may reduce the interest rate on the loan, which could save you more in interest long term.

What is a no-closing-cost refinance?

If you don’t have the cash to pay for closing costs, you still have some refinancing options. A no-closing-cost refinance has no upfront costs, but you will have to pay back the closing costs in other ways.

You can cover these costs by rolling the expenses back into the loan principal or taking a higher interest rate. With the first option, your closing costs will essentially increase your loan amount.

For example, say you want to refinance your remaining mortgage balance of $150,000 for 30 years at 4.49%. If your closing costs amount to $4,500, your new loan amount will be $154,500. Your new monthly payment of principal and interest will be $781, and you’ll pay a total of $127,350.58 in interest over the life of the loan for a total cost of $281,850.58.

However, if you pay those closing costs upfront versus lumping them into the loan, your loan amount will be $150,000 with a monthly payment of $759. You’ll pay less interest over the life of the loan — just $123,343.80, adding up to a total cost of $277,843.80. You save a total of $4,006.78 by paying cash upfront for the closing costs.

If you opt for a higher interest rate instead of rolling the closing costs into the loan principal, this will also increase your monthly payment and increase the amount of interest you pay over the loan term.

How to save money on your refi

There are a few ways to save on a refinance. You should collect quotes from multiple lenders before making your decision. It may be tempting to refinance with your current mortgage lender, but it may not always offer the best deal.

You can check rates and fees online through a general search. You may also see what rates you can get when you pre-qualify with a particular lender. This will require a soft credit check, which won’t impact your credit score, but it can help you gather a few reliable quotes to compare. You can also use these quotes as a negotiation tool with other lenders.

You can lower your interest rate by paying mortgage points, which typically cost 1% of the total mortgage amount.

Another option is to negotiate some of the closing costs with the lender, like requesting an application fee waiver. You should ask for these concessions before you agree to refinance with a specific lender, but keep in mind that some closing costs aren’t negotiable, like property taxes and appraisal fees.

You might also consider paying mortgage points, or discount points, which let you reduce your interest rate. Each mortgage point represents a particular reduction in interest (say 0.25%) and typically costs 1% of the mortgage loan amount. Mortgage point costs and valuations vary depending on the lender. You’ll need to weigh the upfront costs with the overall interest savings to determine if mortgage points are worth it on a refinance.

Another way to save is to ask a loved one for help with the closing costs, but make sure you’re on the same page as your lender regarding gifts. A reviewer from Pennsylvania who refinanced said they weren’t able to use a gift from a friend rather than family — “[The lender] said he had to be a fiance or whatnot.”

Why refinance your mortgage?

Most borrowers choose to refinance in order to save money, whether that’s by reducing interest or lowering their monthly payment. There are a few ways to accomplish this with a refinance: securing a lower interest rate, getting a different loan term or switching from an adjustable to a fixed interest rate.

1. To get a lower interest rate

Many individuals choose to refinance so they can secure a lower interest rate. Interest rates can decrease because of economic conditions, so borrowers can take advantage of these reduced rates through refinancing. Also, if your credit has greatly improved since you first secured a mortgage, you could qualify for a lower interest rate when you refinance.

Here’s how small reductions in interest rates can result in big savings: You locked in a rate of 4.9% on a $250,000 mortgage in 2018, and your monthly payment is $1,326.82. You may be able to secure a lower rate of 3.76% on the remaining balance of $233,810.99. If you refinance at this rate, your new payment will drop to about $1,084.14 on a 30-year loan. That’s a savings of $242.67 a month. You’ll extend the loan term by four years, but you’ll save over $23,000 in interest.

Refinancing for even a slight interest rate reduction can save you thousands of dollars over the life of your loan.

2. To get a different loan term

You may want to refinance in order to get a longer or shorter loan term, depending on your financial goals. Most loan terms are either 15 years or 30 years. You could choose to refinance to a 15-year mortgage if your income has increased and you want to pay off the loan faster. Also, 15-year rates are generally lower than 30-year rates, so you’ll save more in interest.

You may laso consider refinancing to a 30-year mortgage if you want to reduce your monthly payment. This can free up cash in your budget to use elsewhere, like investing more in your retirement accounts — or you could pay off other debt, such as student loans or credit card balances.

3. To get a fixed rate

Refinancing can allow you to lock in a fixed rate if you currently have an adjustable-rate mortgage (ARM). ARMs have a set interest rate for a certain period of time, but, after that, the interest rate could rise, which means a higher monthly payment.

It can be more difficult to budget for a mortgage payment on an ARM for this reason. By locking in a fixed rate through refinancing, you can be sure your monthly payment won’t change over the life of the loan.

4. To access your equity

If you want to access funds from the equity in your home, consider a cash-out refinance. With this type of refinance, you borrow more than you owe on your existing mortgage and take the difference in cash. You can then use the money for any purpose, like renovating your home or paying off high-interest debt.

Keep in mind, though, that this type of refinancing may come with higher interest rates, as one of our reviewers from California notes.

Bottom line

Refinancing your existing mortgage loan can help you save money in interest or reduce your monthly payment. As with most mortgage loans, there are closing costs associated with a refinance (unless you opt for a no-closing-cost refi). No-closing-cost refinances do require that you pay those closing costs one way or another, however, whether that’s rolling the expenses back into the loan or taking a higher interest rate.

When considering whether to refinance, weigh the overall costs with the potential savings. It could make sense to refinance if you have a higher-than-average interest rate and you plan to live in your current home for at least a few more years to recoup the closing costs.

For instance, if closing costs would be $3,000 and you plan to sell your home next year anyway, you probably won’t save in interest what it would cost to refinance.

Also, it may not make sense to refinance if your credit score has fallen significantly since you first applied for a mortgage loan — this could affect the rates you qualify for. Before you consider refinancing, make sure you know your credit situation. This can help you gauge your eligibility and costs ahead of time.