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Refinance your mortgage? These are the costs you will incur

Home loan refinancing
Refinancing your loan can be simple, but it’s not always easy.

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Refinance your mortgage can often save you money in the long run, but it’s not free.

As with your original mortgage, you will incur various closing costs and other expenses when refinancing. It is essential to estimate them in advance. Fortunately, there are several online tools available to help you calculate the numbers and determine if you’ll save in the long run.

There are many reasons to refinance your mortgage, but you should always make sure that the time has come. If you’re considering refinancing, here’s what you need to know.

What is refinancing and how does it work?

Refinancing replaces your existing mortgage with a new one. It works like this: you apply for a new mortgage, submit your documents, and once approved, that loan is used to pay off the old one.

Because refinancing gives you a new loan with a new interest rate, term, and monthly payment, many people refinance their mortgage to save money. Do you think you would benefit from refinancing? First, you should review current interest rates and what you might qualify for.

There are also cash refinances, which allow you to turn the equity in your home into cash. With these, you take out a new loan that is larger than your current loan. This loan pays off your existing balance and you receive the difference between these two figures in cash. You can then use these funds for whatever you want (many use them for home repairs or renovations).

refinancing fees

When you refinance, you will pay closing costs, just like you did with your original mortgage. These include things like appraisal fees, registration fees, mounting fees, title insurance and more. The costs of these can vary widely, but Freddie Mac Estimates the average refinance costs around $5,000.

Some mortgage companies advertise “no closing cost” refinances, but these really just transfer your closing costs into your loan balance. Since your loan balance is then higher, this results in longer-term interest charges. Be sure to do your research in advance before filing any documents. There are marketplaces online that list potential mortgage lenders who can help you.

“A no-closing-cost refinance means you don’t have to pay closing costs,” says Matt Vernon, head of retail lending at Bank of America. “However, that does not mean there are no additional costs. Instead, closing costs will be included in the loan, which will increase the principal balance, or you will pay a higher interest rate. higher interest rate adds up over time.”

If you refinance too quickly after buying a home, you may also owe your lender a prepayment charge. These penalize borrowers who repay their loans too soon (before the lender can make a profit). The exact costs vary greatly, but you can pay around 2% of your loan balance or six to 12 months of interest charges.

Finally, you will also pay interest on your refinance, although this is spread over time and included in your monthly payment. The total interest you will pay depends on the loan amount, the loan term (term) and the interest rate. Generally, you will get the best interest rate with a credit score 740 or more, according to mortgage buyer Fannie Mae.

If you’re unsure of your credit score, don’t worry: you can plug some simple information into this online tool to determine your current range. (Good news: there are always ways to boost your credit score if you are not satisfied).

You may also have the option of purchasing Cash Back Points, which essentially allows you to pay an upfront fee (usually 1% of your loan amount) for a lower interest rate.

Advantages and disadvantages of refinancing your mortgage loan

There can be many benefits to refinancing your mortgage. It could lower your monthly payments or interest charges, help you pay off your loan faster, free up cash, or get much-needed funds for repairs, medical bills, or debt repayment.

Refinancing can also help you get rid of private mortgage insurance in some cases or, if you have an adjustable rate mortgage, switch to a fixed rate mortgage – which would give you more consistency and protect you from future rate increases.

Refinancing, on the other hand, has many upfront costs. And if you plan to sell your home within the next two years, you might not break even. Generally speaking, you should only refinance if you plan to stay in the house until you break even – or the month in which the savings from your refinance outweigh the upfront costs.

If you do a cash-out refinance, it could also erode your equity and pose a risk if your home’s value drops. If so, your mortgage balance could end up being higher than the value of your home. It would be problematic if you had to sell the house (you wouldn’t earn enough to pay off your loan).