Advertiser Disclosure

Mortgage

Understanding Mortgage Refinancing Costs

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

At first glance, refinancing your mortgage to take advantage of lower interest rates might seem like a no-brainer with little or no downside. It’s important, though, to consider closing costs, which can vary greatly depending on factors like your lender, where you live and your creditworthiness. In some cases, your total closing costs could outweigh the benefits of a new loan. Closing costs usually average between 2% and 5% of the purchase price of your home, which means that for a $300,000 home, the closing costs might range from $6,000 to $15,000. So whether you’re refinancing for a lower monthly payment or to pay off your loan earlier, closing costs can make the difference between a smart and a not-so-smart move.

Calculate your mortgage refinance costs

Lenders are required to provide a loan estimate that includes a detailed accounting of closing costs soon after you apply. You can check out a sample loan estimate from the Consumer Financial Protection Bureau. But before you take major steps toward a refinance, use a refinance calculator to get an idea of what your closing costs will be.

The calculator takes into account the current terms of your loan and compares that to the potential new terms of your mortgage, including how long the mortgage would last, the new interest rate and how long you plan on staying in your home. If you’re going from a 30-year fixed mortgage to a 15-year-fixed mortgage, for example, your monthly payments will almost certainly increase, but you will pay less interest over time.

How much would you like to borrow?
Calculate Payment Secured

on LendingTree’s secure website

Common closing cost fees

Closing costs is a blanket term that includes everything from what you pay a lawyer, to title insurance and lender’s fees. Remember that closing costs will vary depending on lender and region. Here’s a look at some of the common fees involved.

Origination fee: 0% to 1.5% of the loan amount
An origination fee is charged by the lender to cover the cost of evaluating your application and processing your loan. Some lenders will waive this fee at the end of the process. Don’t expect to get your money back if your application is rejected.

Underwriting fee: 1% of the loan
Sometimes the underwriting fee is combined with the origination fee. This is a fee the lender charges to have your ability to repay a mortgage assessed by a mortgage underwriter.

Appraisal fee: $300 to $500 for a single-family home; $600 or more for a multi-family home
Even though your home was appraised for your original mortgage, most lenders will require another appraisal to ascertain your home’s current market value.

Title insurance: Roughly $1,000 depending on location
Lenders require title insurance, which covers any issues that could arise during the length of your loan. Lender’s title insurance and owner’s title insurance protect each party in case claims are made after closing. Since you have an existing mortgage, you’ve already paid for a lender’s and owner’s policy, but after a refinance, the original lender’s policy is no longer valid and you must buy a new one.

Credit report fee: $30 to $100
Lenders will pull a copy of your credit report to check your credit score and history, and they will likely pass along the cost of the report to you.

Discount points: 1% of loan amount for every $100,000
Something of a misnomer, discount points actually involve paying more at closing to secure a lower interest rate. Buying two points on a $100,000 refinance, for example, will add $2,000 to closing costs. Generally speaking, this is only considered a wise move if you plan to own the home and keep the mortgage for 15 to 30 years.

Prepayment penalty: Usually one to six months of interest or a percentage of the remaining principal balance
Your original mortgage might have a prepayment penalty, a fee that a lender charges if you pay off the loan early. Find out if your current loan has this fee and how much it is.

Additionally, closing costs may include a variety of smaller fees like escrow fees and processing fees. Some lenders may also charge courier fees, administrative fees and lock-in fees. That’s why it’s important to get a loan estimate from your lender that spells out all your costs before you sign on the dotted line.

Ways to reduce refinance closing costs

With so much money on the line, it makes a lot of sense to try to reduce your closing costs as much as possible. Here are some tips to help you save.

Ask your lender to waive the appraisal
Both Fannie Mae and Freddie Mac have been approving no-appraisal mortgage refinances since 2017. Mostly these are for people who have a down payment of at least 20% and for homes where the companies already have an appraisal on record and have a lot of data on the local housing market. Waiving the appraisal can save you hundreds of dollars.

Negotiate fees
Ask your lender to lower or waive fees, especially ones like the origination fee or credit report fee, in exchange for your business.

Go for a reissue rate on lender’s title insurance
As mentioned above, you’ll be required to pay for lender’s title insurance as part of your refinance loan. But you don’t necessarily have to pay full price. If you buy a new lender’s policy from the company you used for the original loan, you can ask for the reissue rate — a discount that could save as much as 50%. Some restrictions apply, but be sure to ask your lender if you qualify.

Look for the best available deal
Like the song says, “You better shop around.” Get loan estimates from at least three lenders. The estimate should show all the fees you’ll have to pay, and it should allow you to compare costs.

Finally, keep in mind that you might be able to arrange for the lender to cover some or all of the closing costs by including them in the loan. You’ll probably have to pay a higher interest rate, which might run counter to your refinancing goal. It’s worth considering, though, especially if you’re short on upfront cash.

Be wary of “no closing cost” refinances

Who doesn’t like the sound of “no closing costs”? Just remember that most lenders are for-profit, so they’re not give away money for free.

Here they’re offering a way for you to avoid having to pay closing costs upfront, but only at the cost of increasing your interest rate — and possibly making you pay more in the long run. If you’re refinancing to lower your monthly payments or cut down on the amount of interest you’ll pay over the life of your loan, this probably doesn’t make sense.

Bottom line

The Federal Reserve raised interest rates four times in 2018, and has plans for at least two more raises in 2019. While those rates are not for consumer lending, many lenders raise their rates to match. With interest rates rising, it’s even more important to pay close attention to closing costs. Both will impact the overall cost of your refinance.

When you receive a loan estimate from a lender, don’t just give it a quick once-over. Go deep into the document until you understand your closing costs completely. And don’t feel you have to pay whatever the lender asks. Some costs aren’t negotiable but others are. It can be well worth your while to drive hard for a bargain.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage

Getting Preapproved for a Mortgage: A Crucial First Step

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

Getting a mortgage preapproval is a crucial stepping stone on your way to becoming a homeowner, but it doesn’t mean you’re in the clear to borrow from a lender just yet. A preapproval does give you a leg up over the competition, though.

See Mortgage Rate Quotes for Your Home

See RatesSee RatesSee RatesTerms Apply. NMLS ID# 1136

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

What is a mortgage preapproval?

A mortgage preapproval means a lender has vetted your credit and finances and has made an initial loan offer based on its findings. Lenders share this information in writing, so you may hear it referred to as a preapproval letter.

Getting prequalified for a home loan is not the same as a preapproval. Mortgage prequalification provides a rough estimate of how much you might qualify for, based on a surface-level review of your financial information.

A preapproval, however, is a more thorough vetting of your finances and provides a more accurate idea of what a lender may offer in terms of a loan amount and interest rate. You provide financial documentation and agree to a review of your credit profile, which means the lender will pull your credit reports and scores. With a prequalification, you typically self-report your financial information and lenders don’t check your credit.

5 steps to getting preapproved for a mortgage

It’s not worth falling in love with a house until you know the sales price matches up with a mortgage amount you can realistically afford. Here’s how to get preapproved for a mortgage.

  1. Determine your homebuying timeline. The best time to apply for a mortgage preapproval is before you start house hunting. You may want to hold off on a preapproval if you’re not quite ready to begin the homebuying process. Even if you’re not yet prepared, you can get started by pulling your free credit reports from each bureau at AnnualCreditReport.com and reviewing minimum mortgage requirements.
  2. Review and improve your credit profile. With your credit reports in hand, it’s time to look for areas of improvement. The minimum credit score you need for a mortgage varies by program type, but you’ll need at least a 620 credit score in many cases. Dispute any inaccurate information you find, keep your credit card balances low and consistently pay your bills on time. Refrain from applying for new credit and closing any of your existing accounts, too.
  3. Pay down your debt. Pay down your debt. Aside from your credit scores, lenders care about how you manage your debt now and how you’ll fare if you get a mortgage. Your debt-to-income ratio, or the percentage of your gross monthly income used to repay debt, should stay at or below 43%. The less debt you have, the less risky you appear to lenders.
  4. Gather your documents. Lenders will request several documents from you for a preapproval, including:
    • Government-issued photo ID
    • Social Security number
    • Bank statements from the last 60 days
    • Pay stubs from the last 30 days
    • Two years of W-2s or 1099 tax forms
    • Credit reports and scores from all three bureaus
  5. Apply with multiple lenders. Consider banks, credit unions, mortgage brokers and nonbank lenders when applying for a mortgage preapproval, and shop around with three to five lenders to get the best rates. Additionally, keep your shopping period within 14 to 45 days to minimize the impact of those credit inquiries against your credit scores.

How long does a mortgage preapproval last?

A mortgage preapproval typically lasts for 30 to 60 days. The average time to close on a house is 48 days, according to Ellie Mae’s latest Origination Insight Report, so there’s a chance you can get through the full homebuying process before time runs out.

If your preapproval letter expires before you close, you’ll need to go through the process again, submit documentation and have your credit reports and scores pulled, which creates a new credit inquiry and affects your score.

Pros and cons of mortgage preapproval

The mortgage preapproval process includes several benefits, but there are also drawbacks to consider.

Pros:

  • You’ll get a better idea of how much house you could afford, which helps narrow down your price range.
  • Home sellers take you more seriously because you’ll have proof that a lender is willing to back you when you submit an offer.
  • You can comparison shop before committing to a lender.
  • Even if your preapproval is denied, you may walk away with an analysis of where you stand financially and how you can improve.

Cons:

  • A preapproval is not a full approval. It doesn’t guarantee you’ll qualify for a mortgage.
  • Preapprovals typically last for 30 to 60 days. If you don’t buy a home within this time frame, you’ll need a new mortgage preapproval letter.
  • Making changes that affect your credit, such as applying for a new credit line or racking up debt, can prevent you from getting a full mortgage approval.

What happens after you get preapproved for a mortgage?

Once you’ve been preapproved and have chosen a mortgage lender, it’s time to find your home and submit an offer to buy it. You’ll also continue working your way through the mortgage approval process, which includes:

  • Providing your lender with any additional documents needed to finalize your loan.
  • Getting a home appraisal and home inspection.
  • Preparing for your walk-through and closing day.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage

Bridge Loans: What They Are and How They Work

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re shopping for a home in a hot real estate market, you might find that sellers aren’t willing to wait for you to sell your home before you buy. In that case, a bridge loan can help you purchase your next home without the pressure of selling yours first.

Before you take the plunge into the bridge lending world, learn the ins and outs with this guide to understanding bridge loans.

What is a bridge loan?

A bridge loan is a short-term mortgage you can use to access equity in a home you are selling in order to purchase a new home. Bridge loans are commonly used in tight housing markets where bidding wars demand competitive purchase offers without any contingencies.

How does a bridge loan work?

Bridge loans work in two different ways — as a first mortgage to pay off your current loan and fund the down payment of a new house, or as a second mortgage, with the money applied to the down payment of a new home. Let’s explore how each of these work.

First mortgage bridge loan: One large loan is taken out for up to 80% of your home’s value. The funds are initially used to pay off the current mortgage balance. Any extra money leftover is used toward the down payment for your new home.

Second mortgage bridge loan: This option involves borrowing the difference between your current loan balance and up to 80% of your home’s value. The mortgage on your current loan is left alone, and the second mortgage bridge funds are applied to the down payment on the home you’re buying.

Here’s an example of how each option would look if your current home is worth $350,000 with an outstanding loan balance of $200,000, assuming you borrow 80% of your current home’s value.

Bridge loan optionMaximum loan amountHow funds are applied
First mortgage bridge loan$280,000$200,000 to current loan payoff

$80,000 to down payment new home
Second mortgage bridge loan$80,000$80,000 to down payment new home

Pros and cons of buying a home with a bridge loan

Pros

Tap home equity while your home is for sale. A bridge loan lets you tap the equity you’ve built in your current home while it’s for sale to buy a new home. Standard lending guidelines for conventional loans don’t allow cash-out refinancing on a property listed for sale.

Avoid making an extra move. A bridge loan allows you to move while your current home is still being sold so you’re not stuck finding a temporary place to live if you can’t time both sales perfectly.

Pay off the balance of your current loan and get extra cash. If you have a significant amount of equity in your home, you may be able to pay off your current mortgage while you wait for your home to sell. You can then use any extra cash toward a bigger down payment on your new home. This prevents you from paying two mortgage payments until your old home is sold.

Use bridge funds as a second mortgage to buy your new home. If your current mortgage rate is low, paying the entire balance off with a bridge loan doesn’t make sense. If you borrow the equity you have you in your current home as a second mortgage, you’ll have a lower bridge loan balance and payment.

Buy a new home without waiting for your current home to sell. A bridge loan eliminates the need for a home sale contingency, making your offer more competitive in a tight housing market.

Make interest-only payments until your home sells. Some bridge loan programs offer an interest-only option, which means you pay only the interest charges accruing each month. The interest rate may be slightly higher, but it will soften the impact of having two monthly mortgage payments.

Cons

You’ll make two or three mortgage payments. Once you borrow against your equity and buy your new home, you’ll be carrying at least two, possibly three monthly mortgage payments, depending on how you use the bridge loan. This can add up fast and become unsustainable.

Higher interest rates and closing costs. Like most short-term lending options, bridge loans come with higher interest rates and closing costs. Lenders charge higher rates and fees to make it worth their while because you are borrowing only for a short time. You might have trouble making the payments on both mortgages if you have a hard time selling your current home.

Increases the risk of defaulting on two mortgages. Bridge lenders expect you will be able to pay off the loan within a year. If the balance isn’t paid by then, they can foreclose on your home. As a result, your credit and finances will take a massive hit, and you might be unable to repay the mortgages on both homes.

Need substantial equity to qualify. Bridge loans are not a viable choice if you don’t have a good chunk of equity in your home. You can borrow up to 80% of the value of your home, so if you’re in an area where neighborhood values have dropped, you’ll want to come up with alternative financing.

Not as regulated as traditional mortgages. When regulatory reform was passed, it was intended to focus on long-term loan commitments to protect borrowers from taking out loans they couldn’t repay. The new rules don’t apply to temporary or bridge loans with terms of 12 months or less, meaning you’ll have less protection.

How to qualify for a bridge loan

Bridge loans are specialty mortgage loans, and they aren’t approved based on the same standards as a regular mortgage. Lenders that offer these loans have a few extra qualifying hoops for you to jump through, and rates and fees vary depending on property type, too.

Here are some key qualifying requirements unique to bridge loans:

Enough income to cover multiple mortgage payments

Bridge lending guidelines are often set by private investors or are specialized programs offered by institutional banks. That means they can create their own guidelines. Some bridge lenders may not count your current mortgage payment against you because they approve the loan knowing your intent is to pay it off quickly.

Other lenders will require you to qualify with both loans, which could mean you can’t tap into the full amount of your equity unless you have enough income.

At least 20% equity in your current home

Bridge loans work best if you have more than 20% equity, but the bare minimum requirement is 20%. If you don’t, it’s unlikely you’ll qualify for a bridge loan.

A commitment to paying off the loan quickly

Bridge lenders will scrutinize the home you are selling more than the home you are buying to make sure it’s priced to sell within bridge loan’s term period, usually 6 to 12 months. An appraisal will be required on your current home, and if the value comes in significantly lower than what your asking price is, your loan amount will be reduced.

Average closing costs for a bridge loan

Bridge loan closing costs typically range from 1.5% to 3% of the loan amount, and rates can be as high as 8% and 10% depending on your credit profile and how much you are borrowing. Beware of any lender that asks for an upfront deposit to approve a bridge loan; they probably aren’t a legitimate lending source and you should steer clear.

How to find a bridge loan lender

Bridge lending is a niche product, so not every lender will offer the option. You’ll need to shop around with mortgage brokers and institutional banks. Also, ask your current mortgage broker or loan officer whether they have experience closing bridge loans.

Work with a legitimate, licensed loan officer. You can check licensing requirements for all 50 states with the Nationwide Multistate Licensing System Consumer Access link. Type in your loan officer’s name or company information. Here are examples of lenders who may offer bridge loans:

Institutional lenders

Start with your local bank to discuss their bridge loan programs. If you have a substantial amount of deposits with a bank, the bridge loan terms might be more flexible and approval might go more smoothly.

Alternative lenders

Mortgage brokers and mortgage bankers often have relationships with alternative lenders. They can often find a bridge loan source if your current bank doesn’t offer them.

Hard money lenders

A hard money loan may be a good fit for bridge financing to purchase fix-and-flip investment property. Hard money lenders are often private investors, or groups of private investors, looking for high returns on short-term real estate loans. Interest rates can run into the double digits, and you can expect a prepayment penalty and fees range between 2% to 10%, depending on how risky your credit profile is.

Alternatives to using a bridge loan

You can do some advance planning to avoid needing a bridge loan, or at least limit how much bridge financing you need to purchase a home. Here are some other options to consider:

Use an existing home equity line of credit (HELOC)

If you already have a HELOC on your home before you start searching for a new home, you can use the HELOC toward a down payment on your new home. Typically there are no limitations on how you can use HELOC funds. A few drawbacks: You might have to pay a close-out fee when your home sells and the HELOC is paid off and closed, and you won’t get a mortgage interest tax deduction on the extra borrowed equity. You also risk losing your home if you can’t repay the loan because your home is serving as collateral for the loan.

Take out a 401(k) loan

Your retirement savings account can be another tool to bridge the gap in financing, and the rates and payment may be significantly less than what you’ll pay for a bridge loan. Check with your plan provider for any restrictions on loans for home purchases. It may be more cost-effective to take out a 401(k) loan to avoid the closing costs and high interest rates that come with a bridge loan.

The drawback to a 401(k) loan is that the borrowed money is taken from your retirement savings and won’t be working for you in the market. Consider this option only if you plan to repay the loan immediately after your current home sells.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.