The cost to refinance a home mortgage depends on several key factors. The main considerations are the status of the current loan and the value of your home. For most homeowners who refinance, they do not put any additional downpayment into a home refinancing.
The amount of equity you have in your home is the difference between the home's value and the current balance of the mortgage. Lenders will look at the amount of equity expressed as a percentage of the home's value. If a home is worth $200,000 and the mortgage balance is $160,000, the homeowner has 20 percent equity or an 80 percent loan-to value. If the loan balance is $190,000, the amount of equity is just 5 percent. For refinancing, the equity is the equivalent of the down payment for a home purchase.
Types of Costs
The primary costs of refinancing a home mortgage are the closing costs charged by the lender, which can typically run between 3 to 6 percent of the new loan amount. These costs are not considered to be down payments, but can add up to thousands of dollars. A down payment would be money paid to reduce the loan balance and decrease the loan-to-value for the new loan.
A homeowner with 20 percent or more equity can get a standard mortgage refinancing without any additional funds. Homeowners with equity of 5 to 20 percent will require the payment of some form of mortgage insurance added to the loan balance or monthly payment. To reduce the out-of-pocket costs to refinance, closing costs can be rolled into the new loan as long as a sufficient level of equity remains for the lender to accept the new loan-to-value level.
Low Equity Solutions
A homeowner with low or negative equity may have trouble qualifying for a refinance loan without paying in some cash. Some mortgages, including FHA and VA insured loans, qualify for a streamline refinance program where the low or negative equity does not prevent the possibility of a refinance. Homeowners with other types of mortgages should call their mortgage company and ask if there is any type of streamline refinance program available.