By Sabrina Karl
Just like taking out a new mortgage, refinancing involves transaction costs. From lender fees and title service to appraisals and possible discount points, closing costs will accompany any refinancing.
How much your refinance will cost depends on several factors, but most typically ranges from 2 to 5 percent of your loan amount. That means if your refinanced loan will be $250,000, you should expect costs of at least $5,000.
So how to pay for these? There are three main ways. The first is simply to pay out of pocket at the time you’re refinancing. Over the long term, this is generally the lowest cost option, as you won’t be financing those costs. But it can feel like the priciest choice if coughing up that much cash feels like a stretch, or isn’t even doable.
That’s why a popular option is to roll closing costs into the balance of the new mortgage. So if you had planned to refinance to a $250,000 mortgage, with closing costs of $6,000, you would instead take out a mortgage for $256,000.
Obviously you’ll pay interest on the $6,000 for the life of the loan. But since that’s a relatively small amount compared to the full loan, it can be a reasonable trade-off for not having to produce that cash at closing.
The third option is to ask your lender for a no-fee refinance. But the trade-off here is that your overall mortgage rate will go up, perhaps as much as a half percent. This will raise your monthly payment and can prove expensive over time, hitting home the reminder that there is no such thing as a “free” lunch.
Keep in mind that a hybrid approach is sometimes possible, such as paying for your appraisal out of pocket, but then financing the lender fees.