September 18, 2021

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The average cost to refinance a mortgage, and how to save money

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How much does it cost to refinance?

Homeowners typically refinance to save money. Refinancing can result in a lower interest rate and monthly payment — and it could save you thousands over the life of your loan.

However, refinancing your mortgage isn’t free. The process involves paying closing costs again, which average between 2% and 5% of the loan amount.

The good news is refinance closing costs are negotiable. And it’s often possible to refi with no closing costs at all if you play your cards right. Here’s how.

Check your eligibility for a low- or no-cost refinance (Mar 9th, 2021)

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Costs to refinance a mortgage

Closing costs are lender and third-party fees you pay when getting a mortgage. You have to pay these on a refinance, just like you did on your original mortgage.

Closing costs aren’t a flat fee, though. They vary depending on where you live, your loan amount, your lender, the loan program, whether you’re cashing out your home equity, and other factors.

Major closing costs (and estimated amounts) you’ll pay when refinancing a mortgage include: 

  • Loan origination fee — 1%-1.5% of the loan amount
  • Discount points (optional) — 0%-1% of loan amount or more
  • Application fee — $75-$300
  • Credit check fee — $25
  • Home appraisal fee — $500-$1,000+
  • Title search and title insurance — $300-$2,000+
  • Survey fee — $150-$400
  • Attorney fees — $500-$1,000
  • Recording fees — $25-$250 (depending on location)
  • Processing and/or underwriting fee — $300-$900 each
  • Prepaid taxes and homeowners insurance — varies

These are just the big-ticket items. You can see a full list of typical closing costs and amounts here.

The good news is that some closing costs are negotiable. You should always get multiple mortgage quotes from at least three lenders, including your current mortgage company, and compare your Loan Estimates to find the lowest-cost option.

You’re able to compare their fees and terms, which helps you save money. And if you find a lender with a cheaper loan origination fee, title search fee, application fee, or credit check fee, this sways the negotiating power in your favor. 

You can refinance with the lender offering the lowest rate and fees at face value. Or you can use your offers as leverage for negotiation.

Your current lender might match the competitor’s fees or waive certain refinance costs to keep you as a customer.

Compare refinance rates and fees (Mar 9th, 2021)

How are refinance costs determined?

As a rule of thumb, closing costs are typically 2% to 5% of the loan amount.

If you’re refinancing a $200,000 mortgage loan, for example, you could expect to pay between $4,000 and $10,000 in closing costs. 

But whether you’re on the high or low end of this range depends on several factors.

  • Mortgage lender. Lenders charge different upfront fees, so some will have more expensive closing costs than others. You don’t have to refinance with your current lender; you should shop around for a lender with the lowest rate and fees for your new loan
  • Interest rate. Your lender will charge prorated mortgage interest, starting from the date of closing to the first day of the following month. You’ll pay this upfront payment at closing, and your interest rate determines the exact amount
  • Lender credits. Some lenders will extend borrowers ‘lender credits.’ This can eliminate the loan origination fee and potentially other closing costs, in exchange for the borrower paying a slightly higher interest rate. Receiving a lender credit can lower or even eliminate your upfront costs, but the higher rate will cost you more in the long run
  • Discount points. Discount points or ‘mortgage points’ are the opposite of lender credits. This is an upfront fee you pay at closing to get a lower interest rate. Each discount point usually costs 1% of the loan balance and reduces your interest rate by about 0.25%. For example, if you pay two discount points on a $200,000 loan, you’ll pay an additional $4,000 in closing costs
  • Location. Refinance closing costs include prepaid property taxes and insurance, just like your original home loan. Your location will impact these amounts, especially the cost of your prepaid property taxes. But you really aren’t paying extra taxes and insurance to refinance — your current lender refunds any amount it holds in reserve

You might also pay more or less depending on your loan type.

For example, if you’re refinancing into an FHA home loan, which is a government loan backed by the Federal Housing Administration, you’ll pay an upfront mortgage insurance premium (UFMIP) equal to 1.75% of the loan amount. You can roll this fee into the loan or pay it upfront at closing. 

VA loans and USDA loans have similar insurance charges (called the ‘funding fee’ and the ‘upfront guarantee fee,’ respectively), which can also be included in the loan amount.

Be mindful that cash-out refinances often involve higher closing costs since you’re increasing the total loan amount. A cash-out refinance is when you borrow cash from your home’s equity. 

How to refinance with no closing costs

If you’re ready to refinance, you might ask: Can I refinance without paying closing costs?

This is an option, yet it’s important to understand the benefits and drawbacks of no-cost refinance methods.

Your lender might allow rolling your closing costs into your mortgage loan if you have enough equity in your home. The benefit of this approach is that you don’t pay anything upfront. 

On the other hand, rolling the costs into the new mortgage increases your loan balance, meaning you’ll pay interest on this additional amount. This can result in paying thousands more over the life of the loan.

Be mindful, too, that rolling the costs into the loan is only an option with certain types of mortgages.

For example, a VA loan only allows borrowers to roll their funding fee into the loan. Similarly, an FHA refinance can only include the upfront mortgage insurance fee. Other closing costs must be paid upfront.

Another option is to ask for lender credits to avoid paying closing costs. This limits your out-of-pocket costs, but you’ll pay a higher mortgage rate in exchange.

Lender credits are typically better for homeowners who will only keep their new mortgage a few years. After that, the higher interest cost can start to outweigh the upfront savings.

If you plan to keep your refinanced loan long-term, rolling closing costs into the mortgage might make more sense.

Check your no-cost refinance options (Mar 9th, 2021)

How should I pay my refinance costs?

Take a close look at your financial situation when deciding the best way to pay your refinance closing costs. 

If you have sufficient home equity, it might be worthwhile to include these costs in the mortgage and avoid an out-of-pocket expense. 

This also makes sense when you don’t have much in cash reserves, or you don’t want to deplete your personal savings when refinancing.

However, since rolling the costs into the loan means a higher loan balance, a higher monthly mortgage payment, and higher interest charges, it might be better to pay your closing costs out-of-pocket and be done with it.

At the very least, you should try to pay your homeowners insurance and property tax reserves out-of-pocket. You’ll receive a check from your current lender for a similar amount a few weeks after closing. Lenders hold a reserve account for necessary items but refund it to you when you refinance or pay off the loan. Because this is such a temporary cash outlay, it doesn’t make much sense to add that to your new loan balance. However, if you want to raise some cash without doing a cash-out refinance, you could roll taxes and insurance reserves into the new loan and get a sizeable check weeks later from your current lender.

If you’re not sure which refinance option makes the most sense, your loan officer or mortgage broker can help you compare the upfront and long-term costs on a few different loans and help you decide.

Refinance closing cost FAQ

Why does refinancing cost so much?

Closing costs range from 2% to 5% of the loan amount and include lender and third-party fees. Refinancing involves taking out a new loan to replace an old one, so you’ll repay many mortgage-related fees. These include the loan origination fee, appraisal fee, title search fee, application fee, and attorney fees. You might also pay additional fees such as discount points to reduce your interest rate.

Is it cheaper to refinance with my current lender?

Sometimes it is cheaper to refinance with your current lender. It might reduce the cost of certain services, or waive certain fees to keep you as a customer. Still, you should always shop around and get at least three mortgage refinance quotes from different lenders to compare costs, rates, and terms. Another lender’s lower rate or fees might negate the savings you’re offered by your current mortgage company.

Can closing costs be included in a refinance loan?

Mortgage lenders sometimes allow borrowers to roll closing costs into their new mortgage loan. But keep in mind that rolling closing costs into the loan will increase the total loan amount. This is only an option when the homeowner has enough home equity that increasing the loan balance (and therefore the loan-to-value ratio, or LTV) won’t affect their refi eligibility.

Is it worth refinancing for 1%?

A 1% rate drop can often result in significant monthly savings and help you save on interest over the life of the loan. However, each homeowner’s situation is different. Those with a small loan balance may not benefit, even with a 1% rate drop. But those with a large balance could save significantly with just a 0.25% drop. You should evaluate your refinance options based on your current interest rate, new interest rate, loan balance, and overall financial situation.

Is an appraisal required when you refinance?

Most lenders will require an appraisal before refinancing. An appraisal determines a property’s value, and it’s necessary because lenders will not lend more than a home is worth. The home’s value might have changed since you bought it, so a refinance appraisal determines the current market value. However, FHA, VA, and USDA loans have Streamline Refinance options which often don’t require a new appraisal.

Is mortgage insurance required when you refinance?

You’ll need at least 20% equity to avoid private mortgage insurance (PMI) when refinancing. If you have a conventional loan and refinance with at least 20% equity, you will no longer have PMI. If you have an FHA or USDA loan with at least 20% equity, you’ll need to refinance into a conventional loan to eliminate mortgage insurance, since these loan types always require it. Only VA loans require no ongoing mortgage insurance, regardless of your down payment or home equity.

Is a credit check required when you refinance?

Lenders will check a borrower’s credit score and credit report to ensure they meet the minimum credit requirement for a loan program. Typically, you’ll need a minimum FICO score of 620 for a conventional loan, and a minimum of 580 for an FHA loan. The only exception is applying for a Streamline Refinance of your FHA, VA, or USDA loan. In this case, a credit pull might not be required.

When is refinancing a bad idea?

Refinancing might not be a good idea if your credit score needs improvement. If you’re not eligible for the best interest rates, the cost of refinancing might not be worth it. You might also hold off on refinancing if you don’t plan to keep the mortgage long. You typically want to keep the loan long enough to recoup what you paid in closing costs, unless you opt for a no-cost refi.

Does refinancing hurt your credit?

Lenders will check your credit report, and each inquiry can reduce your credit score by a few points. However, multiple inquiries from rate shopping only count as a single inquiry when completed within a 14- to 45-day window. Keep in mind, too, that refinancing pays off and closes your old mortgage loan. Some credit scoring models don’t factor in the history of closed loans when calculating scores, so your credit score might dip slightly after refinancing. 

How can I save more money when I refinance?

Some homeowners can maximize their savings by refinancing into a different loan type or different loan term. For instance, homeowners with 20% equity can refi from an FHA loan to a conventional loan and eliminate PMI costs. Refinancing from a 30-year term to a shorter term, like a 15-year loan, could also net you a lower interest rate and big long-term savings. But your monthly payments would be higher. Refinancing from an adjustable-rate mortgage to a fixed-rate mortgage could also help you save by locking in a lower interest rate for the long term.

What are today’s refinance rates?

Mortgage refinance rates are low across all loan types right now, including rate-and-term and cash-out refinances.

It’s a great time to lock in a low interest rate on your new loan, and many homeowners can choose to refinance with no closing costs.

Check your refinance options to see if a refi is worth it for you at today’s rates.

Verify your new rate (Mar 9th, 2021)

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