What are the hidden costs of refinancing a mortgage?

Record low refi rates have mortgage borrowers refinancing in droves. In fact, according to the most recent Mortgage Monitor Report from Black Knight, more than 6.4 million homeowners have refinanced their mortgage through the third quarter of 2020. The data analytics firm says that we could be on pace to see more than 9 million homeowners complete a mortgage refinance before the end of the year.

However, what most homeowners don't realize is that mortgage refinancing does come at a cost. Put simply, while today's record interest rates mean that many homeowners have a chance to save on mortgage payments, refinancing your mortgage does come with closing costs to pay. With that in mind, let's take a closer look at some of those costs so that you have a better idea of what to expect if you try for a mortgage refi.

3 hidden costs of refinancing a mortgage

Again, today’s low mortgage rates aren't the only thing to consider when you're thinking of loan refinancing. Just like loans for first-time homebuyers, refinance loans come with closing costs. To that end, below are three factors that could influence the cost of your loan.

1. Private mortgage insurance (PMI)
2. ARM vs. fixed rate
3. Adverse market fee

1. Private mortgage insurance (PMI)

While you most commonly hear about private mortgage insurance when you're talking about a down payment, this extra fee can also be applied to refinance loans. In this case, it depends on your loan-to-value (LTV) ratio. If you have a ratio of over 80%, which means that you have less than 20% equity in the property, you'll likely have to pay PMI on your loan.

HOW DO I GET RID OF PMI ON MY HOME LOAN?

2. ARM vs. fixed rate

The mortgage refi rates you are given also depend on the type of interest you're being charged. Fixed-rate loans have a consistent interest rate for the entire length of the loan. In contrast, interest rates on an adjustable-rate mortgage (ARM) can fluctuate over time, often starting with a lower, introductory rate. While conventional wisdom used to be that an ARM made sense if you were not planning on staying in your home for the long haul, these days mortgage refinance lenders are offering such low rates on fixed-rate loans that it may not make sense to take the risk of your interest rate rising in the future.

Click here to learn more about each loan type and how to secure a lower interest rate today.

WHAT'S THE LOWEST RATE EVER FOR A 30-YEAR FIXED MORTGAGE?

3. Adverse market fee

In response to the record-breaking mortgage rates, the Federal Housing Finance Agency (FHFA) has instituted a 0.5% adverse market fee on mortgages that are going to be sold to Fannie Mae or Freddie Mac. The fee went into effect on Dec. 1 and, notably, does not apply to those with government-insured mortgages or those with loan balances less than $125,000.

HOW THE NEW MORTGAGE REFINANCE FEE AFFECTS YOU

How can a mortgage refinance save money?

Before getting into what costs you can expect to see with a refinance mortgage, it’s crucial to make sure you understand how refinancing saves money. At its core, the loan refinancing process involves taking out a new loan to replace your old one. Usually, the new loan will include better terms, including better mortgage interest rates, to help you save money on your monthly mortgage payment.

At the time of reporting, interest rates on 30-year, fixed-rate loans are averaging just 2.66%, according to Freddie Mac. With low mortgage refi rates like those, the majority of borrowers could put money back in their pocket each month by refinancing.

If you're curious to see how much you could save, you can use an online mortgage refinance calculator to help you get a sense of what your new monthly cost could be. And visit Credible to view your loan options across multiple mortgage refinance lenders with fewer forms to fill out.

HOW TO REFINANCE YOUR MORTGAGE

How do I begin the mortgage refinance process?

Now that you have a better idea of what fees to expect, the next step is to learn how to begin the mortgage refinance process. In this case, your best bet is to shop around for a few mortgage refinance services. Truthfully, different banks and lenders will give you different loan estimates based on their fee structure and your financial profile. In order to find the best refinance rates, you should aim to get quotes from at least three mortgage refinance lenders.

Do your best to give each lender the same information. That way, when you have the quotes in hand, you can be sure that you are making an apples-to-apples comparison between them. Once you find the one that's the best fit for you, you can start the application with the lender. From there, the process should be much the same as when you first took out the mortgage on your home.

HOW REFINANCING YOUR MORTGAGE CAN PUT MONEY BACK IN YOUR POCKET