Refinancing Your Mortgage: What You Need To Know About Options & Fees

If you’re considering refinancing your mortgage, it could be a great way to save some serious cash. But before jumping in, you must know what kind of costs come with it. As a loan officer, I get a lot of questions about refinancing expenses and what options are available. So, I put together this guide to help you understand what to expect. Plus, I’ll go over some tips that will help you. So, if you’re ready to learn more about refinancing your mortgage, let’s get started.

What Is Mortgage Refinancing?

Mortgage refinancing is when you replace your current mortgage with a new one. A refinance can be from the same lender or a different one. The main reason people do this is to get a better interest rate, better loan terms, or both. You can also refinance to remove some of your home’s equity or switch from an adjustable-rate mortgage (ARM) to a fixed-rate one. Basically, when you refinance, you’re taking out a new loan to pay off your existing mortgage. The new loan will have different terms, like a different interest rate, loan term, or monthly payment. The purpose is to get better terms than your current mortgage so you can save money over the life of the loan.

Types Of Refinancing

When it comes to mortgage refinancing, there are a few different options to consider. Each has its pros and cons, so you should understand them before deciding. Here are the three most common types of refinancing:

Rate-And-Term Refinance

This type of refinancing is pretty straightforward. Basically, you’re changing either the interest rate or the term (or both) of your current loan. For example, you might have a 30-year fixed-rate mortgage at 4% but want to switch to a 15-year fixed-rate mortgage at 3%, or vice versa.

Pros:

• You can save money on interest over the life of the loan.
• You can lower your monthly payments.
• You can choose to have a shorter or longer loan term.

Cons:

• There may be closing costs.
• Extending your loan term can result in paying more for your mortgage over it’s lifetime.
• You may lose some benefits of your original loan (tax deductions or forgiveness programs).

Cash-Out Refinance

This refinancing option enables you to receive cash by borrowing an amount that exceeds the outstanding balance on your current mortgage. For example, if you have a $200,000 mortgage balance and your home is worth $300,000, you may refinance it to a $250,000 loan and get $50,000 in cash. You can use this cash for any purpose you want, like home improvements, debt consolidation, education expenses, or investing.

Pros:

• Potential to lower interest rates and monthly payments.
• Consolidation of multiple debts into a single, manageable payment.
• You can use the cash for any purpose you want.

Cons:

• Higher interest rates and fees than other types of refinancing.
• May increase the total cost of borrowing over the life of the loan.
• Risk of over-borrowing and accumulating more debt than you can afford to repay.
• Reduction in home equity and potential for negative equity if home values decline.

Cash-In Refinance

This type of refinancing is the opposite of cash-out. Instead of getting cash back, you’re paying down some or all of your existing mortgage balance with money from your savings or other sources before refinancing it into a new loan with better terms. For example, suppose you have a $2000 monthly payment on an ARM that’s about to reset higher. In that case, you might want to pay off $50k from your savings account and refinance it into a 30-year fixed-rate mortgage at 3%.

Pros:

• You can lower your interest rate and/or monthly payment.
• You may only pay for private mortgage insurance (PMI) if you bring down your loan-to-value (LTV) ratio below 80%.

Cons:

• You will lose liquidity by using up your cash reserves.
• You may miss out on potential returns from investing that money elsewhere.
• You may be unable to deduct all the interest paid on your new loan.

Costs Involved When Refinancing A Mortgage

As the saying goes — “There is no such thing as a free lunch.” This also applies to refinancing because there are some costs you should be aware of before proceeding. Here are some of the standard costs involved when refinancing a mortgage:

Lender Fees

These are fees that the lender charges you for processing your loan application, verifying your income and credit, appraising your home, and closing the loan. Lender fees can vary depending on the lender and the type of loan you choose. 

Some common lender fees are:

• Origination fee: For the lender’s work to create and set up your loan. It is usually a percentage of your loan amount, such as 0.5% to 1%.
• Discount points: These are optional fees that you can pay to lower your interest rate. One point equals 1% of your loan amount.
• Application fee: For reviewing your loan application and checking your credit report. It may be a percentage of your loan amount or a flat fee.
• Underwriting fee: For verifying your income, assets, debts, and other financial information. The underwriter also checks if you meet the lender’s guidelines and requirements for the loan.
• Escrow fee: For an escrow agent to handle the transfer of funds and documents between you and the lender at closing.
• Recording fee: For recording your new mortgage in the public records.

Remember that some lenders may offer to waive some or all of these fees in exchange for a higher interest rate or other terms. You should compare different lenders’ offers and fees before choosing one.

Appraisal Fees

An appraisal is a professional assessment of your home’s value, and it’s required by the lender to determine the value of your home. The average cost of an appraisal is around $400 to $800, but it can vary depending on your location and the size of your home.

Title or Attorney Fees

You may have to pay these charges for legal services related to the refinancing process. These fees are required to ensure that the property’s title is clear and that there are no liens or claims. The average cost of title or attorney fees can range from a few hundred dollars to a few thousand dollars. Title or attorney fees will vary depending on the state the home is located in.

Prepaid Fees

These are costs that you pay in advance, including interest, taxes, insurance, and escrow deposits. The amount of prepaid fees are usually calculated based on the number of days left in the month when your loan closes. For example, if you close on March 15th, you would pay 16 days of interest for March as a prepaid fee. Prepaids will also be collected based on when you property taxes and home insurance policy are due. It’s a good idea to compare prepaids when you’re shopping around for a refinance, but most are very similar.

Other Costs To Consider

Some of the additional costs to consider include mortgage insurance premiums and home inspection fees.

• Mortgage insurance premiums: Typically required if your LTV is higher than 80%. So, if your new loan exceeds 80% of your home’s appraised value, you must pay mortgage insurance premiums. These can range from 0.5% to 1% of the loan amount, depending on the lender and the type of loan.
• Home inspection fees: These may be required based on the loan type you are refinancing into. Inspections during a refinance are generally required on government-backed loans.

By considering these additional costs when refinancing your mortgage, you can make sure you clearly understand the total cost of the loan and make a wise decision consistent with your financial goals.

Conclusion

In conclusion, refinancing your mortgage can be a great way to save money on interest rates, lower your monthly payments, or cash out equity in your home. However, before deciding, you must understand the different refinancing options and their pros and cons. There are also costs involved in refinancing, like lender fees, which can vary depending on the lender and the type of loan you choose. To decide if refinancing is ideal for you, research, compare lenders and their rates and fees, and consult a real estate loan officer.

Mortgage Refinancing FAQs