How To Get A Low-Cost Refinance

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By refinancing, you can lower your mortgage interest rate and monthly payments, resulting in long-term savings. However, refinancing means getting a new mortgage to replace your current loan. And just as there were expenses — such as closing costs — when you got your first mortgage, there are costs that come with refinancing. Here are some ways to lower the cost of your refinance.

What are the costs of refinancing?

Refinancing your mortgage isn’t free; it involves closing costs. These can include:

In general, refinance closing costs equal around 2 percent to 5 percent of the new loan amount. Although the balance for your mortgage refinance will be lower than the balance for your original loan, this can still add up. For example, for a $250,000 loan, you’re talking between $5,000 and $12,500.

You may find a lender advertising a low-fee refinance — but this typically means you’ll pay a higher rate than you would with a competitor.

Keep in mind that some lenders will let you negotiate or waive certain fees. Your lender has to provide you with a complete rundown of the fees in your loan estimate.

How to get a low-cost refinance

Take these steps to lower the cost of your refinance.

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:

• Review your credit report. If you find any errors, request to have them fixed. This can help boost your score.
• Improve your credit score. The best way to improve your credit score is to pay down debts on time. The lower your debts compared to your credit limit, the better.
• Build your savings. 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.
• Compare rates online. Shop mortgage refinance rates online to get an idea of what to expect. Look for the annual percentage rate, or APR, which includes fees and is a more comprehensive estimate of the costs of the mortgage than just the interest rate.
• Lock in your rate. When getting approved for a refinance, see if you can lock in your mortgage rate. As long as the loan closes before the rate-lock period expires, this will protect you against rate increases. If rates decline during the lock period, lenders might allow you to take the new, lower rate.

The more you’ll save each month — and overall — on your mortgage, the more quickly you’ll recoup the costs of your refinance.

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. But you’ll want to ensure that you’re still saving money longer term, too.

There are two main ways that no-closing-cost refinances help you avoid paying a lump sum upfront:

• Higher interest rate: The lender might charge you a higher interest rate to make up for the no-closing-cost refinance. The lender still gets 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.

A no-closing-cost refinance can work well if you won’t stay in the home for very long, say five years or less. 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. But if you plan to stay in the home another 15 or 30 years, the cost of a relatively higher interest rate begins to add up.

3. Compare mortgage lenders

You aren’t required to refinance with your current lender. You might get a better mortgage rate simply by shopping around with multiple lenders.

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

Wondering where to start? Bankrate has compiled a list of top mortgage refinance lenders to consider when shopping around for a low-cost refinance. You can also read mortgage lender reviews to learn about other borrowers’ experiences.

4. Negotiate your closing costs

Try negotiating your closing costs with your lender. In some cases, it might offer waivers or discounts. 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

Generally speaking, when deciding whether to refinance, you’ll want to weigh:

• The cost to refinance
• The amount you’ll save by refinancing
• The length of time you plan to stay in the home

Once you know these three pieces of information, you can calculate your break-even point, or the amount of time you must retain the refinanced mortgage to recoup your costs. Your break-even point is the total cost of the refinance divided by your monthly savings.

Let’s say you paid $5,200 in closing costs to refinance your mortgage, and you’ll save $145 per month by receiving a lower rate. In this case, you’ll break even at about 36 months, or three years after your refinance. If you plan to remain in your home for at least that long, a refinance is probably worth it.

Bankrate’s mortgage refinance calculator can help you run the numbers to see what works best for you.

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.

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

  Yes, a cash-out refinance 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 student loan debt or high-interest credit cards. The key is ensuring the rate you’ll pay on your cash-out refinance is lower than the rate you’d pay for each of the debts you’re paying off.

• Are low-cost mortgage refinances subject to the same underwriting processes 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.