Interest rates are lower now than they've been in years, and many homeowners are taking advantage by refinancing their mortgage. But when is a good time to refinance? How do you know if refinancing is worth paying the closing costs again? And how much does it cost to refinance?
First of all, it's important to know how much you're going to save by refinancing. If you don't have many years left on the loan, then it may make more sense to keep the current mortgage rather than pay closing costs again. To find out how much you're going to save by locking in a lower rate, use a mortgage refinance calculator. If you'll save a significant amount each month by refinancing into a lower rate, then it's time to look into how much refinancing costs.
Contrary to popular belief, the bulk of the closing costs actually do not go to your lender. Instead, the costs go to pay third parties such as the title company, appraisers, and credit reporting agencies. You'll notice that refinancing a mortgage has very similar costs to purchasing a home for the first time. Here's a breakdown of what you should expect to pay at closing for a refinance.
Lenders have to know your home is still worth the amount you're borrowing. Just like before, your home has to appraise at or above the amount you're borrowing.
Lenders need a copy of your credit report to see your borrowing history. This is to make sure you're not a risky borrower, and the likelihood that you will pay the loan back is based on your payment history. This money goes towards credit reporting agencies such as Experian, TransUnion and Equifax.
This fee is paid to the title company or attorney for conducting the closing.
This fee is paid to the title company for doing a detailed search of the property records for your home. The title company will look at prior deeds, court records, property and name indexes, and many other documents to ensure that there are no liens or problems associated with your ownership of the property.
This cost goes to determine if your property is located in a federally designated flood zone. If the property is found to be located within a flood zone, you'll need to buy flood insurance.
This covers the cost of document transport to complete the loan transaction as quickly as possible to avoid paying additional interest on your mortgage loan.
This covers the costs of assuring the lender that you own the home and the lender's mortgage is a valid lien.
This is an insurance policy protecting you in the event someone challenges your ownership of the home.
When you refinance, the homeowners insurance should be current at the time of closing. Lenders require a standard coverage at closing, but it should be a smooth transition when you refinance.
Overall, refinancing your mortgage costs a few thousand dollars, so make sure you're going to save more than this overall cost in the savings you'll make in your monthly payments. Also, keep in mind that fees vary between different third party companies and lenders, so the above breakdown is an approximation. For a customized estimate on your closing costs, ask your lender for a Good Faith Estimate based on your situation.