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There are many different reasons why you might decide to refinance your mortgage. Maybe you want to take advantage of lower interest rates, or you want to change your loan term.
If you have enough equity in your home, you might want to eliminate mortgage insurance. No matter what your reasoning might be, it’s important to understand that refinancing isn’t free.
Just like when you took out your original mortgage, some expenses must be paid as part of the process. In this article, we will look into how much it costs to refinance a mortgage and how you can lower the cost.
Key Takeaways
- Refinancing your mortgage will cost you approximately 2 to 5 percent of the loan value. These expenses include the origination fee, appraisal fee, title fee, and more.
- There are several ways to save on the cost of refinancing, including shopping around for lenders, improving your credit score, and negotiating your costs.
- Calculating your break-even point will help you understand if refinancing will be worth the cost.
Mortgage Refinance Fees
Before getting started, it’s important to understand exactly how much it costs to refinance a mortgage. Below is a table that breaks down the costs.
| Type of Fee | Costs |
| Application fee | $75 to $500 |
| Appraisal fee | $225 – $1,000 |
| Credit report fee | Up to $100 |
| Inspection | $200 to $500 |
| Origination fee | Up to 1.5% of the loan amount |
| Recording fee | $25 to $250, depending on state/county |
| Settlement / Attorney fee | $500 to $1,000 |
| Title | $500 to $1,000 |
According to Freddie Mac, the average cost to refinance a mortgage is $5,000. However, this number can fluctuate based on where you live and the size of your home.
Most lenders will tell you to expect to pay anywhere from 2 to 5 percent of the loan value. That means if you borrow $250,000, closing costs could be between $5,000 and $12,500.
» MORE: See today’s refinance rates
Other Ways Refinancing Can Cost You
Depending on your reasoning for refinancing, there might be some other ways refinancing can cost you more.
Increased Loan Balance With a Cash-Out Refinance
With home equity values rising so much in recent years, many people are refinancing to access some of that equity for debt consolidation and home improvements. However, when you complete a cash-out refinance, the amount of cash you receive is then added to your existing principal balance, creating a larger account balance.
Switching From a 15-year to a 30-year Mortgage Increases Interest Charges
Most people choose a 15-year mortgage to pay off their home faster. While a 15-year mortgage will have a larger monthly payment than a 30-year mortgage, you’ll end up paying less in interest.
However, if you decide to refinance into a 30-year mortgage, it will increase the time to pay off your loan and the amount of interest you pay over the life of your loan.
How To Lower Your Refinance Costs
Even though refinancing can cost a significant amount of money, there are ways to lower your costs.
Improve Your Credit Score
To qualify for a conventional loan, you must have a credit score of at least 620. However, if you have anything above 780, you’ll generally receive the lowest possible interest rates on your loan.
If you’re not quite at 780, spend some time improving your credit score. Because you’ll qualify for a lower interest rate, you’ll be able to reduce the cost of your loan when you refinance.
Some ways to improve your credit score include paying all your bills on time and keeping your credit card balances as low as possible.
Compare Multiple Lenders
Similar to how you probably shopped around for a mortgage the first time, comparing refinance offers between multiple lenders is important. Don’t just look at the interest rate they’re offering; compare the fees they charge.
This will help you determine which lender will offer the lowest overall cost of borrowing.
Negotiate The Fees With Your Lender
Once you choose a lender, talk to your loan officer about some of the fees to see if you can get them waived. For example, some lenders will waive the appraisal or use other valuation methods.
You could also discuss a reduction or waiver of the origination fees set by the lender and not a third party.
Consider Buying Points
A common way for many people to lower the interest rate on their loans is to purchase points. Typically you can purchase one point and receive a 0.25% reduction in your interest rate.
The cost would be 1% of the loan amount. If you plan on staying in the home for a longer period of time, buying points can make sense financially.
Use a No Closing Cost Refinance
No closing cost refinances are popular with homeowners who don’t have extra cash for closing costs. However, don’t think these loans are free from closing costs.
Instead, the closing costs are included in the loan amount, or your lender will offer you a higher interest rate. So while you’re still paying closing costs, it saves you from needing the cash at closing.
Breaking Even
While closing costs are expensive, the amount you pay can still save you money in the long run. To understand whether or not refinancing makes sense for your situation, you need to determine the break-even point.
This is where the savings you’d get from refinancing would equal the cost.
For example, assume your closing costs would be $5,000, and you could reduce your monthly mortgage payments by $200. Your break-even point would be 25 months.
That means if you’re planning to stay in your house for more than 25 months, paying the costs of refinancing would make sense financially.
» MORE: Getting ready to buy or refinance a home? We’ll find you a highly rated lender in just a few minutes
When Is It Worth It To Refinance?
There are several reasons why you might choose to refinance your mortgage. It can offer the chance to lower your interest rate, reduce the loan term, or eliminate mortgage insurance.
These are all times when refinancing can be worth it. However, you’ll want to make sure you’re going to stay in the home long enough to reach your breakeven point; otherwise, the cost will outweigh the savings.