How Much Does It Cost to Refinance a Mortgage?
Are you thinking about refinancing your mortgage? You very well could benefit from doing so, as many people choose to refinance their mortgages so they can get a helping hand with paying bills. Others refinance to get some much-needed cash from their equity. Whatever your reasons are for wanting to refinance, it’s important that you fully understand all that this decision entails. There are some costs associated with refinancing your mortgage, so you want to be sure that you’re aware of them before proceeding. We’re going to talk about that a lot more, so let your friendly financial experts at Seek Capital share the inside scoop on refinancing your mortgage.
Why Refinance?
When homeowners refinance their mortgages, it is usually for one of four reasons. Let’s explore each reason so you can better determine if refinancing is what you want to do.
To Lower Your Interest Rate
There is a possibility that you could save thousands of dollars if you decide to refinance your mortgage. This is especially true if you can refinance so that you get a lower interest rate and keep the same term that you currently have on your loan. For example, let’s say you’re refinancing a 10-year loan into another 10-year loan. If you can get a lower interest rate, it will serve to decrease your monthly payment. It’s important to note that doing this will not affect your insurance rates or taxes. These will remain the same regardless of whether you receive a lower interest rate when you refinance. One of the best things you can do when refinancing is to actively compare APRs ( Annual Percentage Rates ). The APR is what will include any added fees that you’ll have to pay, as well as your base interest rate. Keep in mind that larger differences in your APR and base rate will result in you having to pay more on your closing costs when you complete the refinancing process.
To Change Your Loan Term
Many homeowners choose to refinance their mortgage so that they can get a better term. Remember that however many years your loan is, that’s how long you’ll have to make monthly payments. A 40-year term, for example, can feel impossible to overcome. As such, it can be tempting to want to get a better, more manageable loan term. Conversely, there are some homeowners who wish to extend their loan term. Whatever your particular needs may be, refinancing your mortgage can give you the freedom and flexibility you need. Let’s take a moment to look at why you might need a shorter or longer loan term. It’s important to remember, though, that everyone’s needs are different. What may benefit one homeowner may not necessarily benefit you and vice versa. Be sure to thoroughly discuss your options with your spouse (if applicable) and your lender before jumping into a new commitment. Shorter Term This will make it easier to pay off your loan sooner rather than much later. But keep in mind, a shorter term loan means that your payments are going to increase substantially in most cases. The good news is that you can save a sizable portion on your interest fees when you pay off your loan sooner. This is often a good route to go if you get a pay raise and can now afford to make higher monthly payments. It’s best to crunch numbers to make sure that this is something you can comfortably afford to do each month. If so, it may be the best move for you and your family. There is certainly relief in paying off your loan earlier and might be what you need for financial freedom. Longer Term If payments are getting increasingly harder to make, you may need to refinance for a longer term. This can give you the breathing room you need to comfortably make your payments once again. With the way the job market is at the moment, many people have been forced to make changes in their lives. One of which is refinancing for a longer term. If you were affected by the pandemic, for example, and aren’t making the money that you once were, you may need to think about refinancing your mortgage to a longer term until you can get back on your feet. Just keep in mind that this will increase your interest in the long run, so be sure to factor that into your budgeting. If you decide that you can manage the higher interest rate, a longer term refinancing option may serve you well, especially if there’s been a sudden change in your finances and you need to make some room for payments.
To Consolidate Debt
If you’re trying to borrow money affordably (and who isn’t?), a mortgage loan is one of the best moves you can make. Let’s look at it this way: a credit card typically comes with a staggering interest rate of just a little under 18%. Conversely, your average 15-year mortgage loan comes with an interest rate of just 3.5%. As such, it makes sense to refinance your mortgage to help consolidate some of your debt. Of course, this is only beneficial if you have a lot of debt that you can’t seem to get out from under. By receiving a cash-out when you refinance, you can pay off that debt much sooner – sometimes all at once if necessary. This is cash that’s coming right out of your home’s equity so you can effectively pay off more pressing matters. This equity in your home is built upon every time you pay on your mortgage. So whenever you finally pay off your loan, you will have 100% equity in your residence and property. You are essentially taking a loan that is worth more than what you owe out. Your lender gives you the cash and in turn, you use that cash to settle your debts. Depending on your circumstances and lender, you may not see any changes in your term or payments. What’s more, there’s a possibility that your interest rate will remain the same, as well.
The Costs of Refinancing
If you aren’t sure of the costs associated with refinancing your mortgage, you should track down your Closing Disclosure . This is where you will find the exact total that’s owed at closing. Let’s take a moment to explore some of the closing costs that you could possibly pay when you choose to refinance your mortgage. Application Fee Here’s the thing that gets most homeowners. Even if your request to refinance your mortgage is rejected, you’re still going to have to pay for the application process. It’s similar to when you rented before you bought a home and you likely had to pay rental application fees. The same applies when you wish to refinance your mortgage. If you are approved, however, there are even more fees that are likely to be involved. Appraisal Fee The majority of lenders you come across are likely going to request that you have your home appraised before you’re able to refinance. Home appraisals aren’t generally cheap and can run you in the ballpark of several hundreds of dollars. The average cost for a home appraisal is around $400, so be prepared to pay this if your application for refinancing gets the green-light. Attorney Fees A figure for attorney fees is hard to pin down, as each state differs from the next. And in some states, you may not need to have a lawyer examine your paperwork, while in others, it is mandatory. Insurance/Title Search There’s a good chance that your lender will need a new title search when you choose to refinance your mortgage, so be prepared for this to come up. Closing Costs Closing costs are typically around 3% of the amount of your loan. Some lenders will let you combine both your closing costs and your loan balance into one easy-to-manage amount.
Summary
As you can see, there are certainly valid reasons why refinancing your mortgage can benefit you. What is most important is that you weigh the pros and cons to both to see if this is the right move for you to make. You may find that it provides the freedom you’ve been looking for so that you can get back on track. If you are currently struggling with making your payments, you’re not alone. Many people just like you have been affected by the pandemic and are looking for ways to set things right. Refinancing your mortgage could very well hold the key to some short- or long-term flexibility in your life. Be sure to speak with your lender if you need some assistance in figuring out if this is the best option for you. If you’d like to find more information on real estate and other topics of interest, browse the Seek Capital blog for more business and personal finance resources. You may just discover some helpful tips to make your life easier. Sources https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135/ https://www.creditcards.com/credit-card-news/rate-report/ https://www.consumerfinance.gov/ask-cfpb/what-is-a-closing-disclosure-en-1983/