What is mortgage refinancing?
How much does it cost to refinance a mortgage?
- Lender fees, including a mortgage application fee, loan origination charges and points
- Third-party fees, such as the appraisal fee, document recording and a credit check
- Title search/insurance fees
- Escrow costs for property taxes and homeowners insurance
Shopping around for a lender who not only offers a competitive interest rate but also the lowest fees is worth your time and effort. Because refinancing can cost thousands of dollars, make sure refinancing has a tangible financial benefit to you and that you’ll stay in your home long enough to recoup the fees.
What is the break-even point on a mortgage refinance, and why does it matter?
How long do you plan to stay in your home, and why is it important?
What are the most common reasons to refinance a mortgage?
Homeowners refinance their mortgage for a variety of reasons. No matter what your motivation is for refinancing, the result should leave you better off financially. Here are a few common reasons why homeowners decide to refinance a mortgage:
- To lock in a lower interest rate and lower their monthly payments. Homeowners who have improved their credit score or lowered their debt-to-income ratio, for example, might be eligible for a better rate today if they refinance.
- To switch from an adjustable-rate mortgage, or ARM, to a fixed-rate loan. Borrowers who took out an ARM but plan to stay in their homes may want to refinance into a more stable, fixed-rate loan before the ARM resets to a variable rate and payments become unaffordable, or at least less predictable.
- To pull out cash from their home’s equity. A cash-out refinance lets you tap your home’s equity by replacing your existing mortgage with a new one for a larger loan amount, taking the difference in cash.
- To remove a borrower from the mortgage. Divorce is another reason to refinance in order to get your former spouse’s name off the loan. This might also apply if you bought a home with another relative or friend. The person who is refinancing the loan into his or her name will have to qualify for the new loan solely with their own income, credit and employment. Don’t forget that removing someone from a mortgage doesn’t remove them from the deed of the home, which may require filing a legal document called a quitclaim deed (check your state’s property laws for guidance).
- To get rid of FHA mortgage insurance. For borrowers with a loan insured by the Federal Housing Administration, known as FHA loans, refinancing into a conventional mortgage can eliminate annual mortgage premium payments once you’ve reached 20 percent equity in your home.
Refinancing next steps
Make sure you get everything in writing, such as fees and interest rates. Lenders will send you a loan estimate that breaks down your new loan details and all fees. Loan estimates are great tools for comparison shopping to give you the clearest picture of which lender will help you meet your refinance goals.