A refinance is kind of like a mortgage loan. By exchanging your home loan with a new one, you can save money with a new interest rate, tap on your equity or change the loan term.
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6 ways to cut the cost of a mortgage refinance
Average rates on 30-year fixed-rate mortgages have slipped to unusual levels around 2.8%. But the cost of refinancing can make some homeowners cautious, as applications for refinancing loans have dropped recently.
Final costs reimbursed on average around $ 5,000. But look at six ways to lower that price tag – or save on your ref in other ways.
1. Negotiate the closing cost
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Final cost of mortgage refinancing typically ranges from 2% to 6% of the value of the home, meaning that a loan of $ 200,000 can cost up to $ 4000.
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These charges are equal to what you paid when you bought the house: title insurance, a receipt fee, house mating, admission fee, credit report fee and more.
Some of these fees are negotiable, so it’s best to hide from multiple estimates for closing costs to put yourself in a better negotiating position. Once you get offers from a few lenders, compare them side-by-side.
If some fees seem unusually high, ask the lender if they can be reduced. For example, some lenders may deduct the appraisal cost if your property was recently appraised.
A “yes” to any of these requests could help you save hundreds of dollars on your closing costs.
Or you could send your best offer to competing lenders and say, “This is what another lender sent me. Can you do better on closing costs?”
2. Stay with your previous title insurance company
You should buy title insurance when you take out a mortgage – even a refinance loan – because it protects the lender in the event that challenges are ever raised against your title to the property that could cause you to lose your home.
If you work with the same title insurance company that handles your original mortgage loan, you could get up to 40% discount on title fees if you refinance.
This discount is called the ‘reissue percentage’, and an estimated two-thirds of the title policy qualifies there.
3. Consider a ‘no closing cost’ mortgage
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Melody Smart / Shutterstock A mortgage without closing costs is not free, but the costs are not so glamorous.
Some refinances are marked as “closing fee loans”, where you do not pay the usual fees when closing. But keep in mind that you probably will not get a real freebie.
The lender can actually charge you closing costs, but then roll them into your principal balance so that you increase loan size.
Or the bank may offer a credit line to cover your closing costs. The loan recoups the expenses by refinancing a higher interest rate on your loan.
If you are shopping for a free refurbishment, ask multiple lenders for quotes. Compare loan rates and interest rates, and check how much interest you will pay in each refinancing scenario. Compare the interest cost with your current loan to see how much you will save and how long it will take to recover the cost.
“You do not have to refinance if it takes you more than two years to recover your closing costs, if you have one,” said Taylor Allgyer, vice president of First Savings Mortgage. “If you do not reimburse a no cost, your point will be proportionate if you sign the closing papers.”
4. Negotiate your mortgage rate
A great mortgage rate will not reduce your closing costs, but it can help you get your fees back faster.
Here is an example: Say that one loan offers you a 3.25% rate on your refinancing, and your mortgage payment drops by $ 135 a month. The company will charge $ 5,000 in closing costs for the refi.
If you can negotiate the interest rate to 2.75%, you will save $ 220 per month. You break even earlier with the lower rate: 23 months at 2.75%, versus 37 months with 3.25% loan.
To negotiate, shop around and get quotes from various lenders. Receiving and comparing five quotes saves a borrower an average of $ 3,000 over the life of a mortgage, as opposed to a person receiving only one quote, mortgage company Freddie Mac has found.
Remember to also shop for your homeowners insurance next time your policy comes up for its annual renewal. Get rates from multiple insurers and check them side-by-side, because you might find a better deal than you currently have.
5. Boost your credit score
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Another way to reduce your mortgage – and help you recoup those refinancing costs – is by improving your credit score. Overall, having a higher credit score “makes a huge difference” on your refinance rate, says Allgyer.
According to FICO data, lenders with credit port above 760 can cut about 0.4% of their rate for a 30-year, $ 300,000 mortgage compared to lenders with scores ranging from 680 to 699.
That adds up to a savings of $ 63 per month and nearly $ 22,700 over the life of the loan.
Check your credit score before you get a refinance. Nowadays you can watch for free.
If you need score work, then “do not open new accounts, try to keep your usage (credit card) low and make your payments on time,” says Allgyer.
6. Think about buying ‘discount points’
Discount points are fees that you can pay when closing a lender to reduce your interest rate a bit and reduce your mortgage costs.
These fees are fully optional. One point will cost you 1% of the loan value, so on a $ 300,000 mortgage you would pay $ 3,000 per point to get a lower interest rate. How much lower depends on the lender.
But before you buy the rate, you need to consider if it is worth it. If the lower rate on that $ 300,000 loan in the example saves you $ 100 a month, it will take you 30 months to break even on your $ 3,000 point.
Paying points can be a good strategy if you expect to have the house for a long time – or if that’s what it takes to be eligible for the mortgage. If you have strong credit, you would be able to qualify for a low refinancing rate on your own, without needing points.
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