Refinancing a mortgage involves paying off an existing home loan and replacing it with a new one. While most people refinance to save money on their mortgage, the process isn’t free — and many of the costs could surprise you.
Before refinancing your mortgage, make sure you understand these “hidden” refinance costs:
- What Are the ‘Hidden Costs of Refinancing a Home Loan?
- Are No-Closing-Cost Loans a Good Idea?
- Tips To Save On Refinancing Closing Costs
- FAQ: Costs of Mortgage Refinancing
- The Bottom Line on ‘Hidden’ Costs of Refinancing
What Are the ‘Hidden’ Costs of Refinancing a Home Loan?
Though it varies depending on where you live and the size of your loan, the cost to refinance a mortgage averages about $5,000.
But exactly what fees are included in this cost? You might not be expecting some of them — especially since you already paid closing costs when you took out your original mortgage.
1. Appraisal fee
Approximate cost: $313-$421
If you refinance your mortgage, then you’ll likely be required to get another home appraisal. The value of your property may have changed since you first took out your mortgage, so your lender needs to check that the size of the loan is still appropriate for the home’s value.
2. Loan origination fee
Approximate cost: 0.5%-1% of the loan amount
Remember that refinancing involves taking out an entirely new mortgage. That’s why lenders will charge you in exchange for processing the loan. The fee is usually 0.5% to 1% of the loan amount, which means you can expect to pay between $1,250 and $2,500 for a $250,000 mortgage.
3. Title insurance
Approximate cost: $1,000
It’s possible that new claims to your home could have materialized between when you took out your original mortgage and present day. For example, if you didn’t pay your property tax bill when due, your local government may have placed a lien on your title. To reduce their risk, lenders will require title insurance for your refinance, even though you’ve already purchased a policy for your current mortgage.
However, since you’re refinancing, you may be eligible for a discounted premium, so be sure to shop around for the best rate.
Approximate cost: $30 to $70 a month for every $100,000 borrowed
One of the most avoidable costs of refinancing a mortgage is private mortgage insurance. It’s typically required when you’re refinancing a conventional loan and you have less than 20% equity in the home. If you refinance when you don’t have sufficient equity, then you’ll need to cover this monthly cost.
5. Adverse market refinance fee
Approximate cost: 0.5% of the loan amount
Fannie Mae and Freddie Mac, two government-sponsored enterprises that back many mortgages in the U.S., imposed an adverse market refinance fee between August 2020 and July 2021 to cover projected losses from the unstable housing market during the COVID-19 pandemic.
This fee was 0.5% of the mortgage amount, and applied to refinances with loan balances of $125,000 or more. That means jumbo loans and mortgages backed by the Federal Housing Administration, Department of Agriculture, and Veterans Affairs were exempt from the surcharge.
Currently, there isn’t an adverse market refinance fee in place, but it’s possible that Fannie and Freddie could implement one in the future.
6. Prepayment penalty
Approximate cost: Up to 2% of the outstanding loan balance
A prepayment penalty is one of the most “hidden” refinance fees because it’s part of your previous mortgage, not your new one.
Refinancing within three years of taking out your mortgage means you could be charged a prepayment penalty. The fee is up to 2% of the outstanding balance if you refinance during the first two years of your loan term, or up to 1% of the balance if you refinance during the third year.
Legally, before charging the fee, lenders must offer you a similar alternative loan option that doesn’t have a prepayment penalty.
Are No-Closing-Cost Loans a Good Idea?
Lenders may offer refinancing options that are advertised as having “no closing costs” — but this isn’t a true discount on your mortgage. In exchange for the upfront savings, lenders will typically charge higher interest rates or roll the cost into your loan balance, which leads to a bigger monthly mortgage payment.
It’s important to weigh the pros and cons to decide whether a no-closing-cost refinance is right for you.
Tips To Save On Refinance Closing Costs
The “hidden” fees in mortgage loans quickly add up, but there are different ways you can reduce your refinance closing costs.
For example, some closing costs — like origination fees — are negotiable. It’s helpful to shop around and check if you can get a better deal with different lenders.
When you’re refinancing with the same lender, it’s also worth asking if you can waive certain fees. The worst that can happen is your lender says no.
FAQ: Costs of Mortgage Refinancing
Here are a couple of frequently asked questions about the costs of mortgage refinancing.
Your loan estimate, which you should receive within three business days of applying for a refinance, will contain everything you need to know about the cost of your new mortgage, including your estimated closing costs
To prepare for the cost of refinancing a home loan, it’s a good idea to set aside money in a savings account so the cash is ready when you need it. A reasonable ballpark amount to save up for is $5,000, though actual costs can vary depending on your location and loan.
The Bottom Line on the ‘Hidden’ Costs of Refinancing
There are “hidden” mortgage costs that you may initially overlook when refinancing, so it’s important to understand what they are and where to find them. Keep in mind that many of these closing costs are negotiable or avoidable. That’s why it can pay off to do a little research and shop around for the best deals.