What are the costs of refinancing your mortgage?
One of the primary reasons to look into refinancing your home is to secure a lower interest rate. However, refinancing may not make sense due to the costs. Some of those costs, such as Attorney fees, points and other fees can lessen the benefits when the savings aren’t substantial enough. Determining whether refinancing is a reasonable option depends on how much you can reduce your interest rate and calculating the breakeven point between the closing cost and monthly savings. While several things can alter your refinancing costs, three primary categories impact your loan agreement.
First and foremost, the fees associated with the refinance will be a large factor in determining if a refinance makes sense for you. Many lenders will charge points that will extend the breakeven point and limit the benefit of refinancing. Larger loan amounts will have a lower total percentage of closing costs than a smaller loan amount and a lower loan amount can have a higher rate. So, make sure you talk with a local lender to determine what the breakeven point is and if a refinance makes sense based on your individual situation.
The type of loan you will consider will also alter your refinancing costs. For instance, FHA loans require an upfront insurance fee of 1.75% payable to the government, but that fee is added to your loan amount. VA loans also require an upfront funding fee and it is also added to the loan amount.
Another thing to consider is whether your income, debt levels, or credit score changed since you applied for your current mortgage. Lenders are likely to offer you different rates if your financial situation worsened or if you had a few hiccups on the way. Your DTI is also carefully evaluated, and while a shorter-term offers better interest rates, it may increase your mortgage payments above your budget.
When looking to refinance, keep in mind that fees and expenses vary by lender, as well as interest rate. Your goal is to find out whether the cost of refinancing will ultimately save you enough money to justify the costs.
What are mortgage refinancing costs?
When refinancing, the majority of closing costs are for third parties and should be fairly similar. Some of these third parties are Appraisers and Attorneys. With the Appraisal fee, it should typically be one fee around $500 and the Attorney fee will include multiple fees associated with closing the loan as well as obtaining and securing the title work. Keep in mind, there will always be costs associated with refinancing and should be carefully evaluated when refinancing.
Lenders will charge fees and can be categorized differently, such as application fees, underwriting fees or origination fees. Other costs in the lender category are payable to third parties, such as credit reports for lenders and flood certifications, and are mandatory. The average closing costs for refinancing a mortgage in America is around $4,500. These costs vary depending on your financial situation, the location of your mortgaged property and your lender.
The closing costs to refinance your mortgage are similar to the closing costs for a new mortgage with a few differences. Listed below are some of the costs to consider:
Application and origination fees
Some lenders charge between $75 and $300 for Application fees. They may also charge a separate fee for the cost of underwriting your loan that may run as high as 1.5%. Bear in mind that some lenders don’t charge origination fees, which can lower your costs and make a refinance more beneficial.
Credit report costs
Lenders will evaluate your financial situation and check your credit report to understand your borrowing history. These agencies usually charge between $25 and $50.
Appraisal, survey, and inspection
Most lenders will require a careful evaluation of your property to determine sufficient collateral. The appraiser will visit your home and run extensive comparisons, which costs between $400 and $700. Final inspections are required for new construction homes and they are typically around $150. Depending on the age of the current survey, some lenders may require a survey to determine boundary lines and can cost anywhere between $150 and $400, depending on the size of the property.
Title search and title insurance
Mortgage lenders require borrowers to purchase a lender’s title policy and title search to identify any liens or claims on your property. Title insurance protects the lender in case of loss or any defect in the title. You can expect to pay anywhere from $400 to $1000 for these services.
Refinancing your mortgage could potentially save you hundreds of dollars on your monthly mortgage payment and even secure you tens of thousands of dollars long term.
|Mortgage Application Fee||$75 – $500||$235|
|Property Appraisal Fee||$225 – $700||$480|
|Loan Origination Fee||0 – 1.5% of Loan Principal||1% of Loan Principal|
|Inspection Fee||$175 – $350||$255|
|Survey Fee||$150 – $400||$275|
|Attorney and Closing Fees||$500 – $1,000||$750|
|Title Search and Title Insurance||$400 – $900||$733|
|Local Recording Fee||$25 – $250||$138|
|Reconveyance Fee||$50 – $65||$58|
Are mortgage refinancing costs tax-deductible?
If you’re looking one way or another to save money on your annual income taxes, consider how you can use tax deductions to your advantage. For example, you can claim several tax deductions such as mortgage interest to offset household-related costs. The interest deduction is one of the most common itemized deductions available to taxpayers. You can claim these deductions if you meet the following criteria:
- The mortgage is for your primary or secondary residence or second home but cannot be used as a rental property
- Your home is the collateral for your refinancing home
- You itemize your tax return
You can claim the interest that you paid in the last 365 days. Each year, you can claim up to a maximum of $750,000 for a single individual or if you’re filing jointly $375,000. In both cases, you can only deduct the interest you paid that year. However, in exchange for higher deduction standards, the Tax Cuts and Jobs Act eliminated some deductions and lessened the values of others.
Most closing costs can be debited over the lifetime of your loan. However, each of these deductions has its restrictions and eligibility requirements.
For instance, if you purchase discount points or mortgage points to reduce your interest rate, you can deduct 100% of these costs. The IRS’s objective is to collect taxes owed to the federal government, so obviously, these deductions have several limitations. To qualify for most tax deductions, you must itemize your deductions. For more specific information regarding tax benefits, always contact a local Accountant.
Can you roll refinancing costs into a mortgage?
If you’re refinancing a home loan, most often, you’ll be able to include closing costs into your loan. Most homeowners choose to add the closing costs into the loan so that there is no money out of pocket to refinance.
Financing your closing costs doesn’t mean you avoid paying them altogether. It means you won’t have to pay them upfront. If you don’t have enough savings and your rate is low enough, financing your closing costs over your mortgage term is a great strategy.
For more information contact the Cain Mortgage Team.
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