Key takeaways
- Refinancing your mortgage typically costs between 2% and 6% of the new loan amount. These closing costs can include fees for origination, a home appraisal and more.
- You can save on the cost of refinancing by boosting your credit score, comparing mortgage terms and rates, and negotiating closing costs.
- Before refinancing, figure out when you’ll break even — the point at which your monthly savings surpass the upfront cost.
Refinancing your mortgage can lower your monthly payment, turn your equity into cash or change your loan type and term. The process isn’t free, however — there are upfront expenses similar to when you first got the mortgage. If you’re deciding whether to refinance, make sure it’s worthwhile given the costs.
How much does it cost to refinance?
Refinancing your mortgage doesn’t come free. When you replace your current home loan with a new one, you’ll typically pay closing costs, much as you probably did when you first bought your home. Understanding these costs upfront can help you determine whether refinancing makes financial sense for your situation, and how long it will take for you to break even on your investment.
Closing costs
Your refinance closing costs vary by the size of your loan and where you live, but generally, you can expect to pay between 2% and 6% of the new loan balance. For example, if you’re refinancing a $150,000 mortgage, you might pay between $3,000 and $9,000 in closing costs. Here’s a breakdown of common closing costs:
| Closing cost | Fee |
|---|---|
| Application fee | Up to $500 |
| Origination and/or underwriting fee | 0.5% to 1.5% of loan amount |
| Recording fee | $20 to $250, depending on location |
| Appraisal fee | $300 to $1,000 |
| Credit check fee | Typically less than $30 |
| Title services | $300 – $2,000 |
| Survey fee | $2,300 on average |
| Attorney/settlement fee | $500 – $1,000 |
Interest and other loan fees
In addition to your closing costs, there may be other interest-related fees and charges. A common one is pre-paid interest, which is the amount of interest that accrues between the day your loan funds and the end of the month. That amount will depend on your loan balance and interest rate.
You may also choose to pay discount points, which are optional upfront fees that lower your interest rate. A single discount point typically costs 1% of your loan amount and it will lower your interest rate by roughly 0.25%. This may make sense if you are planning to stay in your home for more than a few years.
Another potential charge is a rate lock fee, if you extend your rate lock period, and you may also face lender-specific administrative fees. In some cases, if you refinance into a conventional loan with less than 20% equity, you may need to pay private mortgage insurance (PMI).
Mortgage rate variables
Along with closing costs, refinancing means you’ll begin paying a new mortgage with a new interest rate. This rate depends on many variables, including your:
- Credit score: If you have good or excellent credit, you’ll generally receive a better interest rate.
- Lender: Lenders have different approaches to pricing loans and underwriting, which influence your rate.
- Type of refinance: You’ll typically pay a higher rate on a cash-out refinance than you will on a standard refinance, where you’re simply changing the interest rate and the loan term.
- Loan size and term: The smaller your loan and the shorter the term, the better your rate will be, in general.
- Property type: If you’re refinancing a primary residence, you’ll typically receive a lower rate than you would if refinancing an investment property.
How much does it cost to refinance government-backed loans?
Government-backed loans — including FHA, VA and USDA loans — all offer “streamline” refinance options for qualifying borrowers that may cost less than a typical refinance. Streamline refinances have fewer hoops to jump through. For example, you may not need a credit check or an appraisal.
To qualify for this option, you can’t use the refinance to pull cash out of your home’s equity.
On the other hand, government-backed loans come with their own fees. For instance, VA loans require you to pay a funding fee when you refinance, and FHA loans may require you to pay mortgage insurance premiums (MIP).
Calculate your break-even point
If you’re refinancing to lower your monthly payment, it’s essential to figure out your break-even point — that is, the point at which your savings outweigh your closing costs.
Say your new, lower rate will decrease your monthly payment by $100 every month and refinancing costs you $3,000. Divide your refinance cost by the monthly savings to get your break-even timeframe. In this example, it will take 30 months — or 2.5 years — before you realize the savings. If you don’t plan to sell or refinance in that time, it could be worth it to refinance now.
How to lower the cost to refinance
If you’re refinancing to lower your monthly payment, paying less to refinance helps you realize those savings more quickly. There are a number of ways to reduce your refinance costs:
1. Boost your credit score
Just as first mortgages have credit score requirements, you’ll need to meet credit score minimums to refinance, too. The better your credit, the lower your refinance rate. You can boost your credit by paying off debt, among other strategies.
2. Compare mortgage offers and rates
To score the best possible rate, compare several mortgage refinance lenders based on the annual percentage rate (APR), which includes interest and fees. A mortgage broker may help you get a wider range of quotes. Always get a quote from your existing lender, too — you might qualify for a lower-cost refinance or other repeat customer benefits.
3. Negotiate closing costs
As with your first mortgage, look closely at the loan estimate from your lender. You might save money by negotiating closing costs, especially if you’ve shopped around and have more than one refinance offer. You can use other quotes to check for unusually high fees as well.
4. Ask for fee waivers
Ask your bank or lender if it will waive or lower the application fee or credit check fee — especially if you’re an existing customer. You may also be able to forgo a new home appraisal or property survey if you’ve recently had one done.
5. Choose your original title insurer
In many states, title rates are regulated, but it may cost less for your title insurance company to reissue your policy for your refinanced loan than it would to start over with a new company or policy.
6. Consider a no-closing-cost refinance
If you’re low on cash, consider a no-closing-cost refinance. The name is a bit deceiving, as this refinance isn’t free of closing costs; you simply won’t pay the fees at closing.
Instead, the lender will either raise your interest rate or fold the closing costs into the new loan. Keep in mind, this means that you’ll likely wind up paying more in the long run, and it’ll take longer to hit your break-even point.
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