Can you avoid the costs of refinancing a mortgage?
Homeowners typically refinance to save money, often resulting in a lower interest rate and monthly payment that can save you thousands over the life of your loan.
However, it’s not usually free. The process involves paying refinance closing costs, which average between 2% and 5% of the loan amount.
The good news is that 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. Start hereIn this article (Skip to…)
- Refi closing costs
- List of fees
- Negotiating closing costs
- Determining closing costs
- No-closing-cost refinances
- How should I pay closing costs?
- FAQ
Average costs of refinancing a mortgage
When you decide to refinance your mortgage, it’s crucial to understand that, just like your initial mortgage, refinancing comes with its own set of costs. Similar to the original mortgage, refinancing isn’t free; it comes with its own set of expenses known as closing costs.
Mortgage refinancing costs typically fall between 2% and 6% of the total loan amount. So, if you’re refinancing a $200,000 mortgage, you might be looking at costs anywhere from $4,000 to $10,000.
Mortgage refinancing costs typically fall between 2% and 6% of the total loan amount. So, if you’re refinancing a $200,000 mortgage, you might be looking at costs anywhere from $4,000 to $10,000.
The total cost of refinancing isn’t a fixed number. It can fluctuate based on a variety of factors, such as the size of your loan, the lender you’re working with, the area where you live, your credit score, the amount of home equity you have, and the term of your loan.
Other elements like the type of mortgage (fixed or adjustable rate), the mortgage program, the type of property, and the type of occupancy can also impact the final cost.
What are mortgage refinancing closing costs?
Closing costs are lender fees 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 set amount, though. They vary depending on where you live, your loan amount, your lender, the loan program, whether or not you’re cashing out your home equity.
Check your eligibility for a low- or no-cost refinance. Start here
Common refinancing closing costs
Major closing costs you’ll pay when refinancing a mortgage include:
Compare refinance rates and fees. Start here- 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.
Can you negotiate the costs of refinancing a mortgage?
The good news is that some refinance closing costs are negotiable, especially lender fees charged directly by your mortgage company.
Check your eligibility for a low- or no-cost refinance. Start hereYou can often negotiate the following refinance costs:
- Loan application fees
- Loan origination fees
- Underwriting fees
- Homeowners insurance premiums (by selecting cheaper policies and customizing coverage)
- Title insurance (shop for discounts and ask the title company to waive add-on fees for items like copying or courier charges)
However, there are some non-negotiable expenses, too. Your loan officer likely won’t be able to lower fees charged by third parties such as the survey, home appraisal, or recording fees. Lenders simply pass these fees along to you, the borrower.
Always compare quotes from multiple lenders
You should always get multiple mortgage quotes from at least three lenders, including your current mortgage company. Then compare your Loan Estimates to find the lowest-cost option.
Comparing upfront fees and interest rates can help you save money. And if you find a lender with a cheaper loan origination fee, application fee, or underwriting 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 other 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.
How refinance closing costs are determined
Average closing costs normally range from 2-5% 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.
Compare refinance rates and fees. Start hereThis is a wide price range. 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 refinance 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 to shave about 0.5% from your mortgage rate
- 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 money at closing depending on your loan type.
FHA loans
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.
“If you are currently in an FHA loan, some of this may be rolled over from the upfront MIP you initially paid,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
USDA and VA loans
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.
Cash-out refinances
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
It’s possible to avoid closing costs altogether when you refinance. But you’ll need to understand the benefits and drawbacks of no-closing cost refinance methods — because they can wind up costing you more in the long run.
Compare refinance rates and fees. Start hereRoll closing costs into your loan
Your lender might allow rolling your closing costs into your mortgage loan if you have enough equity in the home. The benefit of this approach is that you don’t pay anything upfront.
On the other hand, rolling these upfront costs into your 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.
Still, rolling closing costs into your loan can make sense when you save a fair amount of money on your monthly mortgage payment. This is especially true when your primary refinance goal is to save money each month.
Ask the lender to pay your closing costs
Another no-closing-cost refinance method is to ask for lender credits. 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 keep their new mortgage for only 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 balance might make more sense.
Should you pay refinance closing costs out of pocket?
Take a close look at your financial situation when deciding the best way to pay your refinance closing costs.
Check your eligibility for a low- or no-cost refinance. Start hereIf you have sufficient home equity, it might be worthwhile to add your refinance closing costs to your mortgage balance to avoid an out-of-pocket expense.
This also makes sense when you don’t have much money saved, or if you don’t want to deplete your personal savings when refinancing.
However, rolling closing costs into your loan increases the loan balance, your monthly mortgage payment, and your total interest charges. So if you can spare the cash, it might be better to pay your closing costs out-of-pocket and be done with it.
Pay prepaid items upfront if you can
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 an escrow account for necessary items but refund the balance 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 and pay it off over many years.
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 sizable 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.
Ultimately, your personal finances and specific needs should help guide your decisions.
Reasons to refinance your mortgage
If you’re thinking about refinancing your home loan, there are several reasons why it might be a good idea. These include changing the term of your loan, securing a lower rate, consolidating existing debts, or withdrawing cash from your home equity. Here’s what you should know.
Changing the duration of your loan
A common reason to refinance is to change the term of your loan. A 30-year mortgage, for example, requires you to make monthly payments for 30 years until your loan is fully repaid. Depending on your financial needs, refinancing may allow you to extend or shorten the term of your loan.
If your current payments are too high, refinancing to a longer term can give you more time to repay your loan and lower your monthly payment. A longer term, on the other hand, means you’ll pay more in interest over the life of the loan.
On the other hand, you can refinance to a shorter loan term in order to pay off your debt faster. While this raises your monthly payment, it saves you money on interest by allowing you to pay off your loan sooner. If your income has significantly increased since you first obtained your loan, this could be a good option. Before choosing a shorter loan term, make sure you can comfortably afford the payments.
Getting a lower interest rate
One of the potential advantages of refinancing is the opportunity to save a significant amount of money, particularly if you can lock in a lower interest rate. This is especially beneficial if you keep the same loan term. For example, if you refinance a 30-year loan into a new 30-year loan with a lower interest rate, your monthly mortgage payment will be lower.
When considering refinancing, it is critical to compare annual percentage rates (APRs). The APR includes your base interest rate as well as any additional fees you’ll have to pay. When you refinance, a larger difference between your base rate and your APR means you’ll pay more in closing costs. When comparing APRs, make sure you’re comparing similar loan types.
Consolidating your debts
One of the most cost-effective ways to borrow money is through a mortgage loan. If you have a lot of high-interest debt, you might be able to save money by consolidating it with a cash-out refinance.
A cash-out refinance involves taking out a larger loan than your current balance. In exchange for this equity, your lender gives you cash. To consolidate their debts, many homeowners use cash-out refinances. A cash-out refinance may or may not change the term, interest rate, or payment of your loan, but it may have tax implications.
Tapping equity home equity
Your cash-out refinance funds aren’t just for debt repayment. Unlike other loan types, this money can be used for almost any purpose. A cash-out refinance is an excellent way to access low-interest funds, whether you want to purchase investment property, cover home improvement costs, or just about any other reason imaginable.
Check your eligibility for a low- or no-cost refinance. Start hereHow to calculate the cost-benefit of refinancing
Refinancing your mortgage can be a strategic move to save money, but it’s essential to weigh the potential savings against the costs involved. To do this, you’ll need to calculate your “break-even point” — the point at which the savings from your new lower-rate mortgage outweigh the costs of refinancing.
- Start by estimating your total closing fees for the refinance, which can range from 2% to 6% of your loan amount.
- Then, determine how much you’ll save on your monthly payments with your new mortgage rate. Divide your total closing fees by your monthly savings to find your break-even point, expressed in months.
- This figure represents how long you’ll need to stay in your home after refinancing to recoup the costs and start saving money.
For instance, if your closing costs are $5,000 and you’ll save $200 per month by refinancing, your break-even point would be 25 months. If you plan to stay in your home for longer than this period, refinancing could be a financially sound decision.
Refinance closing cost FAQ
Check your eligibility for a low- or no-cost refinance. Start hereClosing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third-party fees. Refinancing involves taking out a new loan to replace your old one, so you’ll repay many mortgage-related fees. These include the loan origination fee, appraiser’s fee, credit report fee, application fee, and attorney fees. You might also pay additional fees such as discount points to reduce your interest rate.
It is sometimes cheaper to refinance with your current lender. Your current lender might reduce the cost of certain services or waive select 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.
Mortgage lenders sometimes allow borrowers to roll closing costs into their new mortgage loan. But keep in mind that rolling closing costs into your new loan will increase the total loan amount. And this is an option only when the homeowner has enough home equity to back a larger loan amount. If you don’t have enough home equity, a larger loan may exceed the lender’s loan-to-value (LTV) ratio.
A 1 percent 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 percent rate drop. But those with a large balance could save significantly with just a 0.25 percent drop. You should evaluate your refinance options based on your current interest rate, new interest rate, loan balance, and overall financial situation. A refinance calculator can help you estimate your savings.
Most lenders will require an appraisal before refinancing. An appraisal determines a property’s real estate value, and it’s necessary because lenders will not lend more than a home is worth. Your 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.
You’ll need at least 20 percent equity to avoid private mortgage insurance (PMI) when refinancing. If you have a conventional loan and refinance with at least 20 percent equity, you will no longer have PMI. If you have an FHA or USDA loan with at least 20 percent 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.
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.
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.
Lenders will check your credit report, and each inquiry can reduce your credit score by a few points. However, multiple inquiries from rate shopping count as a single inquiry when completed within a 14- to 30-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.
Some homeowners can maximize their savings by refinancing into a different loan type or different loan term. For instance, homeowners with 20 percent 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.
Fannie Mae and Freddie Mac recently removed a fee called the adverse market refinance fee. This additional closing cost was 0.50 percent of the loan amount, and it was charged to all cash-out refinances and rate-and-term refinance. However, this surcharge has expired.
What are today’s refinance rates?
Refinance rates have risen from the record lows seen during the pandemic. But they’re still low from a historical perspective, and some homeowners still have untapped savings.
Reach out to your lender to check your options to see if a refi is worth it for you at today’s rates.
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