By Kim Porter, MoneyWise
A refinance is kind of like a mortgage do-over. By swapping out your home loan with a new one, you can save money with a new interest rate, tap into your equity or change the loan term.
Average rates on 30-year fixed-rate mortgages have been sliding to unheard-of levels around 2.8%. But the costs of refinancing might be making some homeowners wary, because applications for refi loans recently dropped.
Refinance closing costs total around $5,000, on average. But take a look at six ways to lower that price tag — or save on your refi in other ways.
1. Negotiate the closing costs
Mortgage refinance closing costs typically range from 2% to 6% of the
home’s value, which means refinancing a $200,000 loan may cost upwards
of $4,000.
These charges are similar to what you paid when you purchased the
home: title insurance, an origination fee, home appraisal, recording
fee, credit report fee and more.
Some of these fees are
negotiable, so it’s best to shop around for multiple closing cost
estimates to put yourself in a better bargaining 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 lowered.
For example, some lenders may waive the appraisal fee if your property
was appraised fairly recently.
A "yes" on any of these requests could help you knock hundreds of dollars off your closing costs.
Or,
you could send your best offer to rival lenders and say, "This is what
another lender sent me. Can you do better on the closing costs?"
2. Stick with your previous title insurance company
You're
required to buy title insurance when you take out a mortgage — even a
refinance loan — because it protects the lender in case any challenges
are ever made against your title to the property that could cause you to
lose the home.
If you work with the same title insurance company
that handled your original mortgage loan, you could score up to 40% off
title fees when you refinance.
This discount is called the "reissue rate," and an estimated two-thirds of title policies qualify for it.
3. Consider a 'no-closing-cost' mortgage
Some refinances are marketed as "no-closing-cost loans," where you
don’t pay the usual fees at closing. But keep in mind you’re probably
not getting a true freebie.
The lender may actually charge you closing costs but then roll them into your principal balance, thus increasing your loan size.
Or
the bank might offer a lender credit to cover your closing costs. The
lender recoups the expense by charging you a higher interest rate on
your refinance loan.
If you’re shopping for a no-closing-cost refi, ask multiple lenders for quotes. Compare lender fees and interest rates,
and check how much interest you'll end up paying in each refi scenario.
Compare the interest costs to your current loan to see how much you’ll
save and how long it will take to recoup costs.
“You shouldn’t
refinance if it’s going to cost you more than two years to recoup your
closing costs, if you have any," says Taylor Allgyer, vice president of
First Savings Mortgage. “If you do a no-cost refinance, your break-even
point is when you sign the closing papers."
4. Negotiate your mortgage rate
An amazing mortgage rate won’t lower your closing costs, but it can help you recoup the fees more quickly.
Here's
an example: Say one lender offers you a 3.25% rate on your refinance,
dropping your mortgage payment by $135 a month. The company will charge
$5,000 in closing costs for the refi.
If you can negotiate the
interest rate down to 2.75%, then you save $220 a month. You break even
sooner with the lower rate: 23 months at 2.75%, versus 37 months with
3.25% loan.
To negotiate, shop around and get rate quotes from several lenders. Getting five quotes and comparing them
saves a borrower an average of $3,000 over the life of a mortgage, as
opposed to a person who gets only one quote, mortgage company Freddie
Mac has found.
Remember to shop around for your homeowners insurance, too, next time your policy comes up for its annual renewal. Get rates from multiple insurers and review them side by side, because you may find a better deal than you currently have.
5. Boost your credit score
Another way to knock down your mortgage rate — and help you recoup
those refi costs — is by improving your credit score. Generally, having a
higher credit score "makes a huge difference" on your refinance rate,
Allgyer says.
According to FICO data,
borrowers with credit scores above 760 may shave about 0.4% off their
rate for a 30-year, $300,000 mortgage compared to borrowers with scores
ranging from 680 to 699.
That adds up to a savings of $63 a month and nearly $22,700 over the life of the loan.
Before getting a refinance, check your credit score. Nowadays, you can take a peek for free.
If
your score needs work, then "don’t open up new accounts, try to keep
your (credit card) utilization low and make your payments on time," says
Allgyer.
6. Consider buying 'discount points'
Discount points are fees you can pay a lender at closing to knock down your interest rate a bit and reduce your mortgage costs.
These
fees are totally optional. One point will cost you 1% of the loan
value, so on a $300,000 mortgage you’d pay $3,000 per point to get a
lower interest rate. How much lower depends on the lender.
But
before buying down the rate, you’ve got to consider if it’s worth it. If
the lower rate on that $300,000 loan in the example saves you $100 a
month, it'll take you 30 months to break even on your $3,000 point.
Paying
points can be a good strategy if you expect to own the home for a long
time — or if that's what it takes to qualify for the mortgage. If you
have strong credit, you should be able to qualify for a low refinance rate on your own, with no points required.
See more at MoneyWise
