In many situations, refinancing a mortgage can be the right move. Refinancing may allow you to lower your monthly payment, adjust your loan term, reduce your mortgage interest rate, or cash out on the equity in your home.

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 it to refinance based on your personal situation.

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. This means borrowers usually need to have cash on hand to refinance.

Common mortgage refinance fees

Refinance closing costs can add up quickly, so it’s important to understand what you’re paying for. Common refinance fees include:

  • Appraisal fee ($300-$700): The lender sends an appraiser to make sure your home is worth enough to secure the loan.
  • Application fee (approximately $500): Some lenders charge this fee to cover the cost of processing your application. You might need to pay the fee even if you don’t get approved for your refinance.
  • Homeowners insurance (approximately $1,200 per year): Most lenders will require you to secure a homeowners insurance policy before they extend a home loan.
  • Origination fee (up to 1% of the loan amount): Lenders charge an origination fee to cover the cost of processing the loan.
  • Discount points (variable): Points are prepaid interest that you pay as part of your closing costs to secure a lower interest rate on your mortgage. One point costs 1% of the loan amount, though how much your rate will be reduced depends on the lender.
  • Private mortgage insurance ($30-$70 per month for every $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, you may be required to pay PMI.
  • Title search fee ($75-$300): This fee covers the cost of the lender checking the title of your home to ensure there aren’t any competing claims or liens.
  • Other fees (variable): Depending on where you live and what your lender requires, you may need to pay for additional services such as flood certification.

Individual lenders may charge different fees with varying price points, so be sure to do your research before paying for a refinance.

Average cost to refinance a mortgage

The average cost to refinance a mortgage is approximately $5,000, according to Freddie Mac.

However, the cost of refinancing can vary depending on the type of loan you get. For example, loans backed by Veterans Affairs require a VA funding fee, calculated based on a percentage of the loan, on top of closing costs.

Since several fees are based on the size of the mortgage, that means a larger loan comes with higher closing costs.

Factors that determine refinancing costs

There are many factors that can influence how much it costs to refinance your mortgage. Some common factors include:

  • Loan type: Different loan types 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 for certain services, such as the home appraisal.
  • The lender: Individual lenders may have different rates and fees, which means that shopping around can help you save money on refinancing.
  • Prepayment penalties: If your original mortgage comes with a penalty for paying it off too soon, then your lender will charge an additional fee when you refinance.

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How To Reduce Mortgage Refinance Costs

Refinancing can be expensive, but that doesn’t mean you need to pay a huge amount to refinance. Here are some tips to save money when refinancing.

1. Compare refinance lenders and services

Loan options and fees can vary by lender. By law, lenders must provide a loan estimate, which includes your closing costs, within three days of receiving your application. If you take the time to compare refinance lenders, you’ll find out which one charges the lowest fees, allowing you to save money.

Additionally, you can shop around for other services, like insurance, and try to strike deals. Just make sure that your lender is willing to work with your chosen providers.

2. Negotiate

Closing costs aren’t set in stone. You can request fee waivers or even ask if the lender is willing to lower your mortgage interest rate. Just make sure that the lender doesn’t increase your costs elsewhere to compensate.

If you have multiple loan offers, you can bring them out at the negotiating table. Tell lenders about the others 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 good deal.

3. Look into a no-closing-cost refinance

No-closing-cost refinancing is an option for borrowers who don’t want to pay cash upfront when refinancing their mortgage. With this type of refinance, you can skip the fees at closing — for a price. Lenders typically recoup their closing costs through a higher interest rate or an increased principal. That means borrowers may end up paying more over the life of the loan, even if they save money at the start.  

4. Stay with your current mortgage lender

If you’re planning to refinance your mortgage, one of the best lenders to work with could be your current one. Your mortgage lender already has plenty of information about you and your home. As a result, you might be able to skip certain services ⁠— like getting a title search done ⁠— 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. In particular, your score affects the long-term cost of refinancing 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. You can work toward paying down your existing loan balances and avoid opening new lines of credit. And of course, one of the best ways to build credit is to consistently pay your bills on time.

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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 can be a good idea when:

  • Market interest rates have dropped. You can save money on your mortgage if you refinance to a lower interest rate.
  • 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.
  • 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 credit has improved. A higher credit score can help you get a better interest rate, which saves you more money in the long term.
  • 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.

Refinancing might not be a good idea when:

  • Interest rates have jumped. Refinancing to a higher interest rate can mean paying far more in interest over the life of the mortgage.
  • You plan to move soon. If sell your home or refinance again before your break-even point, then you likely won’t be able to recoup the cost of refinancing.
  • Your credit score has dropped. A lower credit score can mean that you won’t qualify for the best interest rates.
  • Your home’s value has decreased. Your lender might not approve the refinance if your equity has dipped below a certain point. You could also be required to pay PMI.
  • Your mortgage has a prepayment penalty. Covering a prepayment penalty will affect how much you save with a refinance.
  • 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.

Andrew Spearing, a real estate agent and co-founder of Homevisor, a Boston-based real estate investment company, advises homeowners to do the math before making a decision.

“My biggest piece of advice for homeowners looking to refinance is to really know your numbers,” he says. “You might lower your monthly payment from $2,500 to $2,000, but if the refinance costs $12,000, it would take you two years just to break even. And that doesn’t even account for all the extra interest you’ll have to pay over the years if you refinance into a 30-year mortgage.”

Ultimately, you should do your research before refinancing. Understand your lender’s terms, the closing costs, and whether it’s worth refinancing in your situation.

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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 refinance.