Mortgage rates near record low — here's why it's a good idea to refinance

Current rates are so low due to the Federal Reserve's moves to mitigate the financial impact of the coronavirus that many homeowners find themselves wondering, “Should I refinance?"

If you’re in the same boat, the answer depends on whether the savings on your monthly payment is worth the upfront cost. To that end, below is a breakdown of how much it costs to refinance a mortgage.

Read on to learn more about what you can expect to spend. 

How much does it cost to refinance a mortgage?

The exact refinance costs will vary from state-to-state and according to the specifics of your unique transaction.  However, in general, you can expect refinancing to cost anywhere between 2 and 5 percent of your loan amount. This cost will come from charges like the following:

• Application fees: Some lenders charge you a fee to apply for the new loan. This usually costs anywhere between $75-$300 and you’ll have to pay whether or not you’re approved. 
• Origination fees: Origination fees cover the administrative costs of generating the new loan. These fees typically run between 1 and 1.5 percent of the loan amount.  FED CUTS INTEREST RATES AGAIN — WHY YOU SHOULD REFINANCE DEBT NOW
• Appraisal fees: Your lender might require a new appraisal to verify the current market value of your home. This fee generally costs $300-$500. 
• Title search and insurance: A title search verifies that you own the property free and clear with no liens or judgments against it and the insurance protects the validity of the search. This process typically costs $400-$900. 

When is it a good idea to refinance your mortgage?

Given how much it can cost to refinance your mortgage, it may not always make financial sense to do so. If you’re wondering whether the benefits will be worth the upfront investment, here are three signs it makes sense to refinance.

You can get a much lower interest rate

Generally speaking, if you can save at least half a percentage point in interest, it may be worth it to refinance. Interest rates can make a big difference in how much you pay over the life of the loan. 

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For example, a $300,000 loan at an interest rate of 4.5 percent with a 30-year loan term would have a monthly payment of $1,520.06 and a total payment of $547,218.25. The same loan at an interest rate of 3.5% would have a monthly payment of $1,347.13 and a total payment of $484,969.51 That’s a savings of $172.93 per month and $62,248.74 overall.

You plan on staying in the home long enough to see savings

When deciding whether it makes sense to refinance, it’s important to weigh the upfront costs of closing on the loan versus your future savings. You can do this by calculating your break-even point, or taking your total closing costs and dividing them by how much you're saving in your monthly mortgage payment. 

A refinancing calculator can help you do the math, but the answer will tell you how many months that you have to stay in the home in order to see the cost savings go into your pocket. 

You’d benefit from changing the terms of your loan 

Beyond saving money, many homeowners refinance in order to change the terms of their loan. For instance, you could go from an adjustable-rate mortgage (ARM) to a fixed-rate one. This is especially beneficial if your ARM is about to adjust. 

Alternatively, you could go from a 30-year loan term to a 15-year loan term and pay off your mortgage faster. Changing the loan term may also help you save money overall because 15-year rates are often lower than 30-year rates.  

How to refinance your mortgage

When you refinance, you’re essentially replacing your old home loan with a new one, so the process is very similar to when you first applied for your mortgage. Below is an overview of what you can expect:

• Apply with a few lenders: Start by applying for a loan with two or three different lenders. Make sure to give each one the same information, so that you can make an apples-to-apples comparison later on. 
• Compare loan estimates: Each lender will give you a loan estimate, which you can use to compare your monthly payment, loan rates, and closing costs.
• Gather your documents: Once you’ve decided on a lender, you will need to provide them with documentation on your income, debts, and assets.

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• Go through underwriting: After all your information is in, the underwriter will vet your financials and officially approve or deny you for the new loan.
• Close on your loan: Once you’ve been approved, you’ll sign all the paperwork and close on your new loan.