Refinancing a mortgage can be a great way to reduce your interest rate, lower your monthly payments, or get out of debt sooner. However, when considering a refinance, closing costs are an important part of the equation.
Mortgage refinance closing costs often add up to thousands of dollars. But there are ways to reduce these costs or even refinance with no closing costs to pay upfront.
Here’s what you should know about closing costs when you’re refinancing:
- What Are Refinance Closing Costs?
- Common Refinance Closing Costs
- How To Reduce Your Refinance Closing Costs
- What Is a No-Closing-Cost Refinance?
- The Bottom Line on Refinance Closing Costs
The closing costs involved with mortgage refinancing are similar to the closing costs paid when you first bought the home. They include fees charged by your lender and other third parties. Closing costs may include underwriting fees, appraisal fees, inspection fees, credit report fees, title fees, discount points, and attorney fees.
So, just how much should closing costs be on a refinance? Well, that depends on many factors. In general, it’s important to remember that they can add up quickly. Expect refinance closing costs to total between 2% and 5% of the loan amount, with the national average cost being around $5,000.
Each lender will have its own closing costs associated with refinancing a mortgage. Refinance closing costs also may vary based on the type of mortgage loan you have, where you live, and how you structure your refinance.
Here’s a look at common refinancing closing costs, how much you can expect to pay for each, and whether they are required or optional.
Application fees are charged when you apply for a new loan and have the lender review your application. These fees cover certain administrative tasks and things like credit checks. Application fees will vary by lender, but typically run between $75 and $300.
Application fees aren’t charged by all mortgage lenders. To avoid these fees, simply seek out a lender that doesn’t charge them.
If you apply to refinance with your current mortgage lender, you may be able to get the fees waived. You also can ask if the lender will waive the fees for other reasons, such as active military duty.
While fees for underwriting are often included in application fees, some lenders may charge separate underwriting fees — especially if they don’t charge application fees. In this case, the underwriting fees will cover administrative tasks related to accepting, reviewing, and analyzing your refinance application.
An appraisal and an inspection are generally required when financing a home, and your lender may require them again when you refinance.
An appraisal helps determine the fair market value of the home, and allows your lender to decide how much it’s willing to lend you with a refinance.
An inspection is used to determine the condition of the house, and to check if there are problems with the home’s foundation, plumbing, roof, electrical systems, etc.
Appraisal and inspection fees are typically paid directly to the appraiser or inspector. Fees vary according to your location, property layout, and the size of your home. Costs tend to range from about $300 to $500 for an inspection, and $300 to $700 for an appraisal.
A mortgage lender needs to know where a borrower’s credit stands to issue any loan. This involves pulling their credit from one or more of the three credit reporting agencies.
The cost of pulling an applicant’s credit report may be included in the application fees, or as part of the underwriting fees. With some lenders, though, this may be a separate fee, to the tune of about $30 or less. A credit report fee is the only fee that lenders are allowed to charge before providing you with at least a loan estimate.
Title fees are related to your home’s title search. This involves researching your home in government records to ensure that the title is free from unknown liens or other claims to ownership. The cost for a title search averages $200 to $400, and most lenders will require this as part of the refinance approval process.
If you want a better interest rate on your refinance, you could consider purchasing points. Mortgage points are a way of lowering your interest rate for an upfront cost. If you plan to stay in your home for a while, the interest savings over the life of the loan can make up for the cost of buying points upfront.
One mortgage point generally costs 1% of the total loan amount, and each point lowers your interest rate — typically by 0.25 percentage points. For example, say that your lender offers you a $250,000 refinance with an interest rate of 3.75%. You want a rate of 3.25%, so you purchase 2 points for $2,500 per point, which comes to a total of $5,000 — reducing your interest rate by 0.5 percentage points.
Buying points is optional, and might not be offered by all lenders.
Sometimes referred to as closing fees or escrow fees, settlement fees cover expenses related to an escrow account. These fees go toward the cost of managing funds in escrow, transferring funds to the appropriate parties after closing, and handling the signing or notarization of required documents. Settlement fees typically cost between $250 and $1,500, though prices vary based on the escrow or title company, your location, and what’s covered by the fees.
If your state requires an attorney’s review of the transaction documents, expect to pay for this service. Attorney fees may be rolled into other closing costs — such as the settlement fees — depending on your lender and the title company.
Though a survey likely was done when you bought your home, your lender may require another one when you refinance your mortgage. This report shows your property’s size and layout, and may include coordinates for the exact boundaries. If required by your lender, survey fees can cost as little as $150 and run all the way up to $950. The cost of these fees varies widely by location and other factors.
Even though you’re refinancing a home you already own, the transaction needs to be recorded in the public record. Local governments charge recording fees for this. The cost of recording fees depends on where your home is located and can vary significantly. Expect to pay, on average, anywhere from $125 to $400.
Refinancing a home involves a range of different taxes and insurance costs. These may include:
- Property taxes.
- Title insurance.
- Property insurance.
Some taxes and insurance premiums may need to be prepaid when refinancing a mortgage, while others could be paid monthly.
If you’re now wondering how to reduce refinance closing costs, you’re not alone. While closing costs aren’t entirely avoidable, there are some ways you can reduce them and save money.
It’s important to closely examine the fees that a potential lender is charging so that you can determine if they’re all necessary. Sometimes, you may find “junk fees,” which are excessive processing and filing costs that aren’t required. These can be named different things, but are generally called processing fees, rate lock fees, underwriting fees, or application fees. In some cases, they may seem like duplicate costs — that’s when you should ask the lender for clarification.
If any of the closing costs feel unnecessary or too high for what it covers, ask if the cost can be reduced.
A lender might agree to waive certain fees. This is often true with application fees, underwriting fees, transfer fees, and processing fees, especially if a similar fee is already being charged. You’ll have more luck getting fees waived if you’re working with your current lender and the company doesn’t want to lose you as a customer. It’s always wise to at least ask — the worst a lender can do is say no.
Any time you’re planning to refinance, it’s wise to shop around. This helps ensure that you’ll get the best interest rate and the lowest possible fees on your loan.
Ask lenders how much are closing costs to refinance a mortgage with them. If closing costs are the only thing keeping you from refinancing with a particular lender, let the company know that. The lender may be willing to reduce or waive some fees to earn or retain your business.
What Is a No-Closing-Cost Refinance?
If you’re unable or unwilling to pay the upfront fees when refinancing, there are no-closing-cost options available. When considering how to refinance without closing costs, though, it’s important to remember that there’s really no such thing as a free lunch.
“Some borrowers choose what’s called a ‘no-closing-cost’ refinance,” says Michele Anapol, a mortgage loan originator with Jet Direct Mortgage based in Coral Springs, Florida. “The options here are to exchange the closing costs for a higher interest rate throughout the life of the loan — or roll the costs into their monthly mortgage payments.”
With a no-closing-cost refinance, you aren’t avoiding the fees — you’re just moving them to your new loan. This will increase your monthly payment, the total loan amount, and the overall interest paid. At the same time, you might still want to choose a no-closing-cost refinance if you can’t afford these upfront expenses out of pocket.
Closing costs are an added expense any time you’re refinancing a home. While these costs can seem high, knowing what to expect will help you prepare for them. If you shop around before refinancing, you can often find a lower interest rate and affordable closing costs. Ask your lender if you have any questions, don’t understand what a particular fee is for, or want to reduce or waive one of the costs altogether.