Getting a new mortgage to replace the original mortgage is called refinancing. The purpose of refinancing is to allow a borrower to obtain a better interest term and rate. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage.
When you refinance your home the costs are around 1.5 %. So, if your principal is $300,000, you can estimate 1.5%, or $4,500, as the closing costs on a mortgage refinance. And if refinancing will lower your payment from $1,500 per month to $1,300 per month, you’ll save $200 per month, or $2,400 per year.
Many people consider refinancing in order to use some of the equity in the home to pay off debts or to improve the house (build a new deck, a new kitchen, a new bathroom etc.).
1. Mortgage application fee
This is the fee you pay to apply for a new mortgage. (When you refinance, you close out your current mortgage and open a new mortgage.) The application fee tends to be around $250 to $500.
2. Appraisal report
Most lenders will require a home appraisal to determine whether it has enough value (and you have enough equity) to qualify for the new mortgage. This can cost anywhere from $500 to $750, and the outcome of the appraisal can determine whether it’s smart to refinance or not. If the appraiser’s findings show that your home value dropped and the ratio of your loan-to-value is higher than your lender allows (typically 80%), you may have to put down cash to make up for it, or buy mortgage insurance.
3. Loan origination fee
The loan origination fee is typically about 1% of the total value of your loan. If you refinance a principal balance of $300,000, for example, your origination fee will be around $3,000.
4. Document preparation fee
Many lenders will charge you a document preparation fee that typically ranges from $200 to $500.
5. Flood certification
You may need to pay $50 to $150 for flood certification, which is mandatory in some areas.
6. Title search
Before your lender approves the refinance, they often require a title search, which costs from $200 to $400.
7. Title insurance
The lender and the homeowner might be expected to buy title insurance to guard against any problems or errors with the title transfer. This may amount to $400 to $800, though rates vary.
8. Recording fee
The county or city you live in may charge a recording fee for handling the paperwork, which may add another $25 to $250 to your total bill.
Mortgage Points, also called discount points, are fees paid directly to the lender (financial institution) at closing in exchange for a reduced interest rate. This is also called buying down the rate which can lower your monthly mortgage payments. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).
Use our free amortization calculator to determine how payments change as you change the interest rate and amount for the loan.
A mortgage broker may be someone to talk to before you make any deal with a bank because they may be able to get a lower interest rate for you. They will compare offers from many different sources and see which is best for you. The lender would pay their fees normally, so you should not worry about it.