- Refinancing your mortgage comes with various upfront costs and fees.
- The amount varies, but according to Freddie Mac, you'll usually pay between 2% and 6% of the loan amount.
- There are many strategies you can use to reduce your refinancing costs.
If mortgage rates have gone down since you first got your loan, refinancing your home can help save money on your monthly mortgage payment. It can lower your interest rate, or stretch your mortgage over several more years.
But the refinancing process can be expensive. Refinancing essentially replaces your old mortgage with a new one, and that typically means paying closing costs all over again.
Understanding refinancing costs
When you take out a mortgage, you'll pay a number of fees and closing costs. Refinancing is no different.
What is refinancing?
Refinancing is the act of replacing your current mortgage loan with a new one. This will mean a new rate, term, and monthly payment.
Why refinance your mortgage?
There are many reasons to refinance your mortgage. You may do it to get a lower mortgage rate, if rates have dropped since taking out your first loan, and you might want to change your loan term. For example, if you refinanced from your current loan into a new 30-year mortgage, it would spread your current balance over more months and lower your payment. Refinancing into a shorter term would do the opposite — but allow you to pay off your loan faster.
You can also refinance your mortgage to tap your home equity. This requires a cash-out refinance — meaning your new loan is bigger than your old one, and you get the balance back in cash. You can then use the funds however you'd like.
Breakdown of refinancing costs
When you refinance, you may pay a little less in closing costs than what you paid on your original loan. According to Freddie Mac, you can typically expect to pay about 2% to 6% of the loan amount — or around $5,000.
And keep in mind: Refinancing closing costs aren't just one fee — there are several expenses that make up closing costs. Much of the money you pay at closing covers your mortgage lender's fees and any services that were used in the process of underwriting and closing on your loan. Some of your costs may also go to taxes.
Here's a list of some of the fees you can expect to see in your refinance process, along with estimates of what each will cost according to data from the Federal Reserve.
Application fee
- Cost range: $75 to $300
Applying for another mortgage will cost you. This fee typically isn't refundable.
Loan origination fee
- Cost range: Up to 1.5% of the loan's principal
Not all lenders charge this fee, but some do. It could be a costly addition to your closing costs — a $200,000 mortgage balance with a 1.5% origination fee would add $3,000 to your closing costs.
Appraisal fee
- Cost range: $300 to $700, if needed
If your home hasn't been appraised recently, you may need to pay for an appraisal. This process involves a licensed appraiser, who will assess your home and determine its fair market value.
Title search and insurance
- Cost range: $700 to $900
Lenders complete a home title search to make sure you're the owner, and check for any liens you have on the home. If there's a mistake on the title that would jeopardize their investment, the title insurance provides protection to the lender.
Discount points
Discount points are a fee you pay to lower your mortgage rate. You'll usually pay 1% of the loan amount to get an interest rate around 0.25% lower, though the exact numbers depend on your lender.
Prepayment penalty
- Cost range: One to six months' interest payments, if applicable.
Some lenders charge mortgage prepayment penalties on loans paid off before expected. Since a mortgage refinance will essentially pay off your old loan before your expected payoff date, your old lender could charge a prepayment penalty.
Not all loans have a prepayment penalty. Ask your lender if your current mortgage has a prepayment penalty, and if so, how much it is.
Other miscellaneous fees
If your home hasn't had a survey recently, your lender could require one. This essentially verifies that your home and all of its structures are where the title says they are. These usually range from $150 to $400.
The company or lawyer that conducted your home's closing will also need to be paid for their work, and this will become part of your closing expenses. Attorney's fees typically come to $500 to $1,000.
Finally, you may also owe property taxes when you close on your refinance. Costs vary based on where you live, and your home's value. According to Bank of America, six months of property taxes are generally due at closing.
Factors influencing refinancing costs
Refinancing costs aren't set in stone, and there are many factors that can influence the one you get. These include:
Loan amount and term
Many fees are calculated as a percentage of your total loan amount, so how much you borrow will play a big role in your total costs.
Credit score
Lenders usually charge borrowers with low credit scores more, as they are considered at higher risk of default. Borrowers with better scores tend to see fewer fees and costs.
Type of loan
The kind of loan you're getting matters, too. Some loans, like VA loans, for instance, limit how much you can pay in closing costs. Others have standard fees you'll need to pay (USDA loans have a guarantee fee, for example).
Lender policies
Every lender approaches fees and rates differently. This is why shopping around for your lender and comparing quotes is so critical. We'll go more into this later on.
How to minimize refinancing costs
There are ways to reduce the cost of refinancing your home, including:
Shop around for lenders
For certain closing costs, such as your title search fee, you're allowed to choose your service providers rather than going with the default ones the lender chooses. The services you're allowed to shop for will be listed on your loan estimate — the Consumer Financial Protection Bureau has an example on its website.
Negotiate fees
While there are some costs your lender probably can't budge on, such as appraisal fees, others might be open to negotiation. These include application and origination fees.
Ask your refinance lender if there is any leeway on these costs.
Consider a no-closing-cost refinance
It's also possible to refinance without paying closing costs up front. Instead, you'll pay for the costs over the life of the loan.
Lenders make up for the closing costs in two ways, according to the Consumer Financial Protection Bureau. Some lenders will charge higher mortgage refinance rates for borrowers who opt for loans without closing costs. Other lenders will add the closing costs to the loan's principal, increasing the total amount you owe, and the total amount you'll pay interest on.
While closing costs might seem high, it's generally cheaper to pay them up front, even if you're paying them a second time around while refinancing.
Is refinancing worth the cost?
Refinancing can be expensive, so it's important to be sure those costs are worth it before you dive in. You can do this by:
Calculating your break-even point
This is the point at which your refinance saves you more than its fees cost. You can calculate yours by taking the total estimated loan costs and dividing that by the amount the refinance will save you each month. The number you get will tell you in which month the savings outweigh the cost.
For example, if the refinance would save you $25 per month and cost $3,000 in fees, you'd have a break-even point of 120 months or 10 years (3,000 divided by 25). If you don't think you'll be in the home for that full 10 years, a refinance might not pay off.
Long-term savings
You can also look at the long-term savings a refinance will net you. For instance, if you're able to pay off your loan five years earlier with a refinance, how much interest will that save you?
You can also think about the other opportunities the refinance could open up. If the refi reduces your monthly payment, does that free up cash you could invest elsewhere? Or maybe put toward other goals? These factors matter, too.
FAQs on refinancing costs
The average cost to refinance a mortgage typically ranges from 2% to 5% of the loan amount or about $5,000.
Yes, refinancing can save you money in the long run if you secure a lower interest rate or a shorter loan term.
You can reduce refinancing costs by shopping around for lenders, negotiating fees, and considering a no-closing cost refinance.
Calculate your break-even point and compare the long-term savings to determine if refinancing is right for you.
