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How to get a low-cost mortgage refinance

Key takeaways

  • A mortgage refinance allows you to change your existing mortgage, such as adjusting the term or switching to a new interest rate.

  • Refinancing lands you with a brand new mortgage that replaces your old one, which means you’ll need to pay closing costs.

  • Always shop around and compare at least three lenders to find the lowest-cost mortgage refinance option.

Refinancing gives you the opportunity to adjust the details of your mortgage, such as the term or interest rate. By refinancing, it’s possible to lower your mortgage interest rate and monthly payments, resulting in long-term savings.

It’s important to remember, though, that refinancing basically means getting a new mortgage to replace your current loan. And just as there were expenses (aka closing costs) when you got your first mortgage, there are costs that come with refinancing. Here are some ways to improve your chances of getting a low cost refinance.

What are the costs of refinancing?

If you want a low fee refinance, it’s important to understand what expenses you might be on the hook for. Some closing costs involved when you refinance your mortgage include the following:

Fee type

Average fee

Loan origination fee

0.5% to 1% of mortgage principal

Appraisal fee

$500

Survey fee (if needed to determine property boundaries)

$400 – $1,000+

Credit report fee

About $30

Title fee (title search, insurance, etc.)

About $300

Taxes

Varies by location

Discount points

1% of the loan amount per point

Depending on your lender, you might be able to have some of these fees waived. Your lender has to provide you with a complete rundown of the fees in your loan estimate. You can also find out which fees are negotiable so you can best navigate low cost refinancing.

How to lower the cost of refinancing

There are some steps you can take to help you get the lowest closing cost refinance possible.

1. Get the lowest possible rate

Qualifying for the lowest possible mortgage refinance rate is one of the best ways to save money long-term.

Here are some tips for ensuring that you’re likely to get the most favorable rate:

  • Review your credit report. Take a look at your credit report to make sure there aren’t errors. Fixing mistakes can help you boost your score.

  • Improve your credit score. Your debt-to-income (DTI) ratio plays a big part in the terms you’re offered. See if there are some loans you can pay off or outstanding credit card balances you can pay down to lower your DTI ratio. In addition, ask to increase your credit limits on any cards. Don’t let delinquent accounts ding your score: Make payments on time and for the minimum amount, at least.

  • Build your savings. Add to your savings whenever possible. With more savings, you might be seen as less of a risk and score better rates as a result.

  • Choose your loan term wisely. A shorter loan term usually means a lower rate but a higher monthly payment. If you can afford the higher payment on a 15-year refinance, you might be able to get a better interest rate than what you’d receive with a 30-year term.

  • Organize your affairs. Know exactly where you stand, what paperwork you need and what to expect. When you’re organized, you have more information, and you’re in a better position to negotiate.

  • Compare rates online. Take a look online to see what mortgage refinance rates are available. This can give you an idea of what to expect. Be sure that you’re comparing the annual percentage rate, or APR, on offers since this includes other fees related to the mortgage. The advertised interest rate doesn’t include these extra fees, which can impact your costs.

  • Lock in your rate. When getting approved for a refinance, see if you can lock in your mortgage rate. Locking in your rate can help protect you against increases as long as the loan closes within a set time. If rates decline during the lock period, lenders might allow you to take the new, lower rate.

2. Consider a no-closing-cost refinance

One way to get a low cost refinance is to avoid closing costs altogether. With a no-closing-cost refinance, you don’t incur any upfront fees. That can save you money — at least in the short term.

However, you need to make sure you understand whether your lender is actually waiving your closing costs or simply shifting some of the fees. There are two main ways that no-closing-cost refinances work to help you avoid paying a lump sum upfront:

  • Higher interest rate: Your lender might charge you a higher interest rate to make up for the no-closing-cost refinance. The lender still ends up recovering what you would have paid in closing costs because you’re paying more in interest.

  • Roll fees into the principal: The lender can add the closing costs to your overall loan balance. It is convenient — no need to dig up cash on closing day — but it increases the total sum you’re borrowing and the amount that interest is going to be calculated on.

One caveat: Both of these scenarios result in paying more in interest over time, either because of the higher rate or because you have a bigger principal amount.

3. Compare mortgage lenders

You are not required to refinance with your current lender, and you can get a better mortgage rate simply by shopping around with multiple lenders. In fact, you could save an average of $600 annually over the life of your loan by obtaining at least two rate quotes, according to a study by Freddie Mac. At least four rate quotes could save more than $1,200 annually.

Plus, if you get an attractive quote from one lender, you could have leverage with the next — or your primary mortgage place.

Wondering where to start? Bankrate has compiled a list of top mortgage refinance lenders to consider.

4. Consult with your lender

You can also try negotiating your closing costs with the lender. It might be able to reduce or waive certain fees, so ask if there are discounts or waivers available. Sometimes, if you’re already a borrower with the lender or if you can show some other compelling reason (like you’ll choose another lender with a better offer), you might be able to get a break.

How to calculate if refinancing is worth it for you

Whether refinancing is worth it depends on your individual situation, as well as the numbers. Bankrate’s mortgage refinance calculator can help you run the numbers to see what works best for your situation and needs.

However, it’s not just about avoiding upfront closing costs. How long you’ll be in the home and your own preferences play a role in the decision, too.

In particular, a no-closing-cost refinance can work well if you won’t stay in the home for very long: a good rule of thumb is if you plan to be out of the house within five years. If you can save on overall costs before you plan to move out, it might be worth the cost and even be a net benefit.

With a loan like this, though, the extra or higher interest can add up to much more than the original closing costs if you keep the loan for another 15 to 30 years — so if you plan to stay put, consider other options. It might make more sense to pay your closing costs upfront in a lump sum rather than doing something that increases the interest you’ll pay.

Even if you stay in the home, refinancing still can be worth it — if you can save a lot on interest and payments, either with a lower interest rate or a shorter loan term.

Low cost refinance FAQ

  • Are low-cost mortgage refinances available for all types of mortgages (e.g., conventional, FHA, VA)?

    Not all types of mortgages may be eligible for certain refinancing. For example, rate-and-term refinancing remains the most flexible type and is available for conventional, FHA, VA and USDA mortgages. However, a USDA mortgage is not eligible for a cash-out refinance, and conventional loans are not eligible for streamline refinancing. Be sure to check your eligibility to ensure you can get the type of refinancing you want.

  • Can I use a low-cost mortgage refinance to consolidate other debts, such as credit cards or student loans?

    A low cost mortgage refinance lets you save money on closing costs so you can put more money toward other financial goals, such as paying off student loan debt or high-interest credit cards. In addition, a cash-out refinance in particular can be a great way to consolidate debts. By tapping a portion of your home’s equity, you’ll receive a lump sum payment you can use to pay off other debts. But by doing a cash-out refinance, you’ll get a newer, larger mortgage.

  • Are low-cost mortgage refinances subject to the same underwriting process as regular refinances?

    The mortgage refinance underwriting process is typically the same for low cost refinances, but it may skip some paperwork if you can negotiate away some fees.

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