If you’re qualified, refinancing a mortgage has many advantages. It can lower your monthly payment, adjust your loan term, reduce your mortgage interest rate, or let you borrow cash against your home equity.
However, refinancing isn’t free. Because you’re getting a new loan, you must pay closing costs when you refinance — just like when you took out your original mortgage. That’s why you should figure out when it’s worth refinancing based on your personal situation.
Learn more about how much it costs to refinance a mortgage:
- What Are Refinance Closing Costs?
- Average Cost To Refinance a Mortgage
- Reasons To Refinance Your Mortgage
- How To Reduce Mortgage Refinance Costs
- Are You Ready To Refinance Your Mortgage?
- FAQ: The Cost To Refinance Your Mortgage
- The Bottom Line on Mortgage Refinance Costs
What Are Refinance Closing Costs?
Refinancing comes with fees that pay for services associated with taking out the loan, such as credit checks, home appraisals, and so on.
Understanding these costs is important. Knowing how much it costs to refinance your mortgage is one of the first steps in figuring out whether you’ll save money by refinancing.
Common mortgage refinance costs
Refinance closing costs can add up quickly, so it’s important to understand what you’re paying for.
Common Refinance Fees
|Type of Fee||Cost||Details|
|Appraisal fee||$300 to $500||The lender sends an appraiser to make sure your home is worth enough to secure the loan.|
|Application fee||About $500||Some lenders charge this fee to cover the cost of processing your application. You might need to pay this fee even if your application is denied.|
|Homeowners insurance||About $1,200 per year||Most lenders will require you to prove that you have a homeowners insurance policy in place before they agree to refinance.|
|Origination fee||Up to 1% of your mortgage amount||Lenders charge an origination fee to cover the cost of processing the loan.|
|Discount points||1% of the loan amount per point||Points are prepaid interest that you pay as part of your closing costs to secure a lower interest rate on your mortgage. One discount point costs 1% of the loan amount, though how much your rate will be reduced depends on the lender. Points usually can be bought in fractions of a percent.|
|Private mortgage insurance||$30 to $70 per month per $100,000 borrowed||PMI is necessary if the borrower has less than 20% equity in their home. If you’re taking out equity with a cash-out refinance, or if your home’s value has dipped, then you may be required to pay PMI.|
|Title search fee||$200 to $400||This fee covers the cost of the lender checking the title of your home to ensure there are no competing claims or liens.|
|Title insurance||Up to $1,000||This insurance protects your lender from losses caused by unknown liens or claims against the home.|
|Credit report fee||$30 or less||This covers the cost of your lender checking your credit score.|
|Document preparation fee||$100 or less||This covers costs related to preparing loan documents and other documentation.|
|Home inspection fee||$300 to $500||This pays for an inspection of your home’s condition, including how safe it is and how well its major systems work.|
|Recording fee||$100 to $200||This is a government fee for recording a real estate transaction or document, such as a deed, in local records.|
|Survey fee||$300 to $950||This pays a surveyor to come to the property and draw up a document detailing its boundaries, and the size and location of the structures on it. These documents are used in the event of a property line dispute.|
|Attorney fees||$600 to $1,500||This covers the cost of having a lawyer review your purchase and sale agreement, mortgage documents, and other paperwork.|
|Closing fees||Varies||The covers other miscellaneous fees, as well as things like prepaid interest, taxes, and insurance.|
Individual mortgage lenders may charge different fees with varying price points, so researching and comparing costs can help you save money and choose the best deal.
Average Cost To Refinance a Mortgage
This cost varies depending on the type of loan you get. For example, loans backed by Veterans Affairs require a VA funding fee, which is a percentage of the loan amount and paid in addition to closing costs. If you get a $300,000 VA loan, you could expect to pay about $5,000 in closing costs plus a VA funding fee of 0.5%, which would add $1,500 to your closing costs.
Since several fees are based on the size of the mortgage, a larger mortgage such as a jumbo loan will come with higher closing costs.
Factors that determine refinance mortgage costs
Many factors influence how much it costs to refinance a mortgage, including:
- Loan type. Different types of mortgages come with different refinance costs. Government-backed loans, for example, may require additional fees on top of closing costs.
- Loan amount. Lenders charge a percentage of the loan for certain services, meaning that the more you borrow, the higher the fees.
- Location. Where the property is located can affect the prices of certain services, such as the home appraisal.
- The lender. Individual lenders will have different rates and fees, which means that shopping around for the best deal can help you save money on refinancing.
- Prepayment penalties. If your original mortgage comes with a penalty for paying it off early, you may need to pay this fee to refinance.
Reasons To Refinance Your Mortgage
Despite its cost, refinancing your mortgage can make sense when you have these types of goals:
- Lowering your interest rate. When you refinance a mortgage, you replace your existing loan with a new one. That means a new interest rate. If your credit has improved or market rates have gone down, refinancing could secure you a lower rate.
- Changing your loan term. Refinancing lets you extend the term of your loan to lower your monthly payments or shorten the term of your loan to pay it off more quickly and reduce your overall interest costs.
- Borrowing your home equity. With a cash-out refinance, you can borrow more than your current mortgage balance. You can use the difference for other purposes, such as home improvement projects, investing, or major medical or educational expenses.
- Changing your loan type. When you refinance, you can select the type of loan and the features of your new loan. For example, that lets you change from a Federal Housing Administration loan to a conventional loan. You also could swap between a fixed-rate and adjustable-rate loan.
- Eliminating PMI. Mortgage insurance is an additional cost that you have to pay, typically when you offer a smaller down payment or get certain government-backed loans. Refinancing when you have sufficient home equity or to change loan programs can end monthly PMI payments.
- Consolidating debt. Mortgage interest rates typically are lower than other loan rates, so you can use a cash-out refinance to consolidate high-interest debts into your mortgage payment.
The most important factor to consider is the break-even point, which is the point where your overall savings exceed the cost of getting the loan, says R.J. Weiss, a certified financial planner in Geneva, Illinois.
“To calculate the break-even point, you take the total costs of the refinance and divide it by the monthly savings from the lower interest rate,” he says.
For example, if the refinance costs are $5,000 and the monthly savings on the mortgage payment are $100, the break-even point would be 50 months.
“For the refinance to make sense financially, the client should plan to stay in the home for at least as long, and ideally much longer, as it takes to reach the break-even point,” Weiss says.
How To Reduce Mortgage Refinance Costs
Here are some tips to save money when refinancing.
1. Compare refinance lenders and services
Loan options and fees vary by lender. Lenders are required to provide a loan estimate, which includes your closing costs, within three days of receiving your application. If you compare estimates from multiple refinance lenders, you’ll find out which one charges the lowest fees, allowing you to save money.
Additionally, you can shop around for some services, such as insurance. Just make sure that your lender is willing to work with your chosen providers.
Closing costs aren’t set in stone. You can request fee waivers or even ask lenders if they are willing to lower your mortgage interest rate or other costs. Just make sure that the lenders don’t increase your costs elsewhere to compensate.
If you have multiple loan offers, you may be able to use them to negotiate a better deal. Tell lenders about the other loans you’re considering, and ask for a better offer. If you can get the lenders competing for your business, you might be able to score a better deal.
3. Get a no-closing-cost refinance
No-closing-cost refinancing is an option for borrowers who want to avoid paying cash upfront when refinancing their mortgage. With this type of refinance, you skip the fees at closing — for a price. Lenders typically recoup closing costs by charging you a higher interest rate or by adding the closing costs to your principal balance. Typically, no-closing-cost loans have rates that are 0.25 to 0.50 percentage points higher than loans with closing costs.
For example, a typical 30-year mortgage might have an interest rate of 7%. If you refinance $200,000, you’ll pay $1,331 per month for a total of $479,160 over the life of the loan. Add $5,000 in closing costs, and the total cost of the loan will be $484,160. If the lender offers no-closing-cost loans with an interest rate premium of 0.25 percentage points, that boosts your monthly payment to $1,364 per month for a total of $491,040 over the life of the loan — slightly more than if you paid closing costs upfront.
4. Stay with your current mortgage lender
If you’re planning to refinance your mortgage, the best lender to work with could be your current one. Your mortgage lender already knows you and your home. As a result, you might be able to skip certain services — like the title search — or the lender may offer a loyalty discount to keep your business.
5. Improve your credit
Your credit score plays a significant role in determining the cost of refinancing a loan, because it influences the interest rate that your lender will charge. Generally, the higher your credit score, the lower the interest rate on your new mortgage — which could save you thousands of dollars in interest over time.
If your credit is less than stellar, take steps to boost your score by paying down your existing loan balances and not opening new credit accounts. And, of course, one of the best ways to build credit is to consistently pay your bills on time.
6. Avoid buying points
Points are a form of prepaid interest and typically cost 1% of the loan amount. If you pay for points, you’re adding to the upfront cost of a refinance. Points can make sense if they reduce the interest rate sufficiently and you plan to keep the loan for the long run. If your goal is to keep upfront and closing costs down, buying points won’t help you.
7. Stay with your original title insurer
When you refinance, you’ll need to get title insurance again to protect your lender, especially if you switch to a new lender.
You can keep your current personal title insurance, which can help you save money. Some title companies also offer a discount if you use them again when you refinance your loan. They’ve already done a lot of the work, so it’s easier and cheaper to do it a second time.
Are You Ready To Refinance Your Mortgage?
If you’re wondering whether you’re ready to refinance, think about your goals for refinancing and evaluate your current situation.
Refinancing vs. Keeping Your Current Loan
|When To Refinance||When To Keep Your Loan|
|Market interest rates have dropped. You can save money on your mortgage if you refinance to a lower interest rate.||Interest rates have increased. Refinancing to a higher interest rate can mean paying far more in interest over the life of the mortgage.|
|You expect to stay in the home for a long time. A key part of calculating your savings is determining the break-even point, which is when the money saved from refinancing equals the closing costs you paid. If you plan to own the home for longer than that, then you’re saving money.||You plan to move soon. If you sell your home or refinance again before your break-even point, then you likely won’t be able to recoup the cost of refinancing.|
|The value of your home has increased. If your home’s appraised value has grown since you took out your original mortgage, then you’ll have more equity to work with if you want to do a cash-out refinance or get rid of PMI.||Your home’s value has decreased. Your lender might not approve the refinance if your equity has dipped below a certain point. You also could be required to pay PMI.|
|Your credit has improved. A higher credit score can help you get a lower interest rate, which saves you more money in the long term.||Your credit score has dropped. A lower credit score can mean that you won’t qualify for the best interest rates.|
|You have more income. If you got a new job or received a raise and can afford to make higher monthly payments, then you could consider refinancing to a shorter term and paying off your loan faster.||You can’t afford the new monthly payments. If you’re refinancing to shorten your loan term or increase the principal, you may end up financially crunched trying to make the higher monthly mortgage payments.|
|Your mortgage has a prepayment penalty. Covering a prepayment penalty will affect how much you save with a refinance.|
FAQ: The Cost To Refinance Your Mortgage
Here are answers to frequently asked questions about the cost of refinancing your mortgage.
While refinancing to a higher interest rate can mean spending more money, there are times when it can make sense. For example, if your budget is tight, refinancing to extend your loan term could lower your payments even if it boosts your interest rate.
Points reduce the interest rate on your loan, lowering your loan’s total cost and the monthly payment. Though it increases your closing costs, paying for points can be a good idea if you plan to keep the home for a long time. It’s a good idea to do the math to figure out how long you have to stay in the home to break even.
Refinancing can be well worth the cost, but it’s important to think about your reasons for refinancing. If your goal is to save money, you’ll want to compare the cost of refinancing to the savings it will generate, such as lowering your monthly payment. If you’re refinancing for another reason, such as extending the loan term or consolidating debts, it’s less of a direct comparison. You’ll have to think about what you’re willing to pay to accomplish those goals.
The Bottom Line on Mortgage Refinance Costs
Refinancing can help you lower your monthly housing expenses or save money on your mortgage. But make sure to understand all the costs involved with refinancing — and find out how you can reduce them. By doing so, you’ll have a stronger chance of achieving your financial goals with a mortgage refinance.
- Freddie Mac