Thinking of Refinancing? Be Prepared for This Little-Known Cost

Refinancing won't cost you anything upfront, right? Wrong.

Right now isn't the best time to be hunting for a deal on a new mortgage loan, but what if you already own a home and are hoping to refinance it and get a different mortgage rate? Rates are up across the board, so you may not save money on interest now, but there is one instance where you may want to proceed with a refinance sooner rather than later anyway.

If you're sitting on a nice amount of home equity and want to take cash out so you consolidate credit card debt, or maybe fund a needed (or wanted) home renovation, it could be worth it to try pursuing a cash-out refinance. With a cash-out refinance, you swap your old home loan for a new one for more than you owe, and take out some of your home equity as cash in the process. Since home values are still up, your home could appraise high enough to allow you to take out a nice chunk of money to fund your goals. Getting a cash-out refinance is all profit to you, right? Here's why not.

Be mindful of your closing costs

You may remember paying closing costs on your original mortgage when you closed on the loan. Closing costs for a mortgage include lender fees, appraisal fees, and costs for underwriting and obtaining credit reports. Unfortunately, you will also be on the hook for many of these costs again if you decide to refinance your mortgage.

How much are you likely to pay for refinance closing costs? Let's see what all they entail:

• Some lenders charge application and origination fees to start your refinance process.
• You'll have to pay for the copies of your credit report your lender will get from the reporting agencies.
• It's likely your lender will want a detailed and thorough appraisal, inspection, and survey of your home to see how much it's worth and make sure it will be sufficient collateral for the new loan they'll be giving you.
• You could also have to pay for a title search and insurance, to ensure there are no outstanding claims on the property (and if there are, the insurance will protect against loss).
• The closing costs themselves go to pay the title company or attorneys closing the loan.
• You may have other costs, like flood certification or mortgage points (to lower your interest rate; this is optional).

All told, you're likely looking at paying 2%-6% of the total cost of the new loan in closing costs.

Can you reduce your refinance costs?

The good news is that some of the above listed refinance costs may be negotiable depending on your lender and your individual circumstances. As in many parts of life, shopping around can save you money on your closing costs. You might check out three or four refinance lenders, and one of them may require you to pay less in the process of securing the loan.

You might also get a lender to work with you on certain requirements you would otherwise have to pay for, like a home appraisal. If property values in your neighborhood are up, the lender may be willing to waive an appraisal. And finally, you may be able to roll your closing costs into the new loan and pay them off over time. Note that this will not save you money in the end, and it will increase your monthly mortgage payments, but at least you won't be shelling out a pile of money at closing if you go this route.

While a home refinance could be a good idea for you, especially while property values are up, don't forget about those closing costs. If paying them could be a hardship, consider shopping around with different lenders to save money, or ask if any fees can be waived.