Refinancing a mortgage can set you back 2% to 6% of the loan amount in fees and closing costs, and the average cost to refinance is about $5,000, according to Freddie Mac. You’ll have to budget for these costs, but refinancing can reduce the overall price tag of a loan, provide a more affordable monthly payment or allow you to access your home’s equity.
Sometimes, the hefty price can be worth it, but not always. Homeowners should consider the refinance closing costs, potential loan savings, how long they plan to remain in the home and ways to pursue a lower-cost refinance.
How much does mortgage refinancing cost?
Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you’re refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500.
Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges. Your specific fees and amounts will depend on your location, mortgage amount, lender and loan type.
Depending on your lender and loan program, you may incur additional fees, like an inspection fee, mortgage points, upfront funding fees or mortgage insurance premiums. A refinance cost calculator (like this one from Freddie Mac) can help you estimate your closing costs. Here are some of the costs commonly associated with refinancing a mortgage:
| Closing cost | Amount |
|---|---|
Loan origination or underwriting fee | Up to 1.5% of the loan principal |
Application/credit report fee | $75 to $500 |
Appraisal fee | $300 to $700 |
Survey fee | $150 to $400 |
Home inspection fee | $175 to $350 |
Title services | $700 to $900 |
Attorney fee | $500 to $1000 |
Government recording fee | Varies by county |
Tax service fee | Varies by county |
No-closing-cost refinancing
Some lenders offer a no-closing-cost refinance, which means you pay little to nothing out of pocket. However, the lender recoups the closing costs in one of two ways: They charge a higher interest rate or roll the fees into the loan principal. Some lenders do both.
Let’s say you want to refinance a $350,000 loan balance with a new 30-year fixed-rate mortgage of 7.50%. The closing costs are $14,000 — or 4% of the principal. You could pay that upfront cost, but your lender also offers a no-closing-cost refinance at the same interest rate, so you decide to roll the closing costs into your loan. Your monthly dues will increase by $98, which may seem like a reasonable trade-off, but you’ll end up paying an additional $21,240 in interest charges over the repayment term.
| Closing costs paid upfront | Closing costs rolled into loan principal | |
|---|---|---|
Starting loan balance | $350,000 | $364,000 |
Principal and interest payment | $2,447 | $2,545 |
Total interest paid | $531,010 | $552,250 |
Total loan cost | $881,010 | $916,250 |
A no-closing-cost refinance is almost always more expensive in the long run than paying the fees upfront. Still, it can provide a path to refinancing for borrowers who don’t have the cash on hand.
6 ways to lower the cost of refinancing
Refinancing can be a great way to save money on your mortgage, and there are steps you can take to further reduce the amount you pay in upfront costs or over the life of your loan.
- Shop around and compare loan offers. Lenders have different fee structures and loan programs, so you can benefit from comparing loan estimates from at least three lenders.
“One lender may charge $500 for the application fee, while another may charge only $300,” said George Fraguio, vice president of lending at Vaster Capital.
In addition to comparing closing costs, review APRs to understand the annual cost of borrowing, including fees. Read about our picks for the best mortgage refinancing lenders.
- Negotiate closing costs. When a lender provides a loan estimate, there may be wiggle room in some of the fees. You can use your various quotes to negotiate individual charges. For example, if one lender stands out as having better terms overall but their origination fee is higher than another quote, you can ask them to lower it. Some lenders may also grant an appraisal waiver and use an alternative method to determine your home’s value.
- Improve your credit scores. Your credit scores represent your overall creditworthiness in the eyes of lenders and will help determine your interest rate. Buyers with higher scores will qualify for more competitive rates and terms. While a lower interest rate won’t change your upfront closing costs, it can add up to significant savings over time.
- Consider whether buying points is worth it. Buying down the interest rate on your refinance loan will increase your closing costs, but it can provide significant savings over the life of the mortgage. One “point” typically reduces your interest rate by 0.25 percentage points and costs 1% of your loan amount — on a $200,000 loan, you’d pay $2,000 to buy one point. Assuming a 5.00% interest rate and a 30-year term, you’d save almost $11,000 in overall interest by dropping your rate to 4.75%. Buying points can be a worthwhile investment if you plan to stay in your home for a long time.
- Consider refinancing with your current lender or bank. Comparing lenders is essential to finding the best deal, but be sure to start with your existing lender. They may be more willing to negotiate or waive closing costs and may even provide incentives to keep your business. Your bank or credit union may also offer discounts or fee waivers as an incentive to current customers.
- Use the same third-party services. The title company or lawyer you used on your original purchase may lower their fees for repeat customers refinancing the same property as the original loan.
When it makes sense to refinance your mortgage
Do you want to save money each month, or do you want to tap into your home’s equity? Your goals can help you determine whether refinancing is right for you. The following scenarios may indicate that refinancing your mortgage is smart.
You qualify for a lower interest rate
One of the primary incentives for refinancing a mortgage is to lower the interest rate, which can reduce the monthly payment and total loan cost. Refinancing to a lower rate can save thousands of dollars on interest, depending on how much time you have left on your mortgage and your new loan term. You may also qualify for a lower rate if your credit score has improved since taking out the loan.
Keep in mind that refinance rates are typically slightly higher than purchase interest rates. So, even if rates have lowered, you might pay a higher rate than if you were purchasing a home.
You want to change your loan term
Refinancing to a shorter term (like from a 30-year loan to a 15-year loan) can help you build equity faster, pay off your loan sooner and reduce the interest paid. However, it would also increase your monthly payment. The rate on the new loan will determine if the refinance provides sufficient savings.
Shorter-term mortgages have lower interest rates than longer-term loans, but refinancing could actually result in a higher rate if mortgage interest rates have risen since your original loan. Moving to a shorter-term loan is best for homeowners who can afford the higher payment and can refinance without increasing their rate.
On the other hand, you may want to extend your loan term to make the monthly dues more affordable. Suppose you’re two years into repaying your 15-year loan for $400,000 at 4.00%. Refinancing into a 30-year loan at 7.50% could lower your monthly payment by $446, but you’ll pay a whopping $261,969 in additional interest. Refinancing to a longer term isn’t ideal because it increases the loan cost and extends the time you’re in debt, but it can be a path to making your mortgage more manageable.
You want to change your loan type
Refinancing can be a good option if you want to change the interest rate structure on your loan. For instance, if you have an adjustable-rate mortgage (ARM) with a low rate, refinancing to a fixed-rate loan would lock in your rate and prevent future increases.
Similarly, homeowners with government-backed mortgages like FHA or USDA loans may want to refinance to a conventional (non-government) loan to eliminate mortgage insurance premiums or funding fees. This option is best if your credit score qualifies you for a conventional loan with a competitive interest rate and you have enough home equity to avoid paying private mortgage insurance (PMI).
You want to tap your home’s equity
With a cash-out refinance, you take out a new loan for a higher amount than your current mortgage balance and receive the difference in cash. Many homeowners leverage their home equity to pay off high-interest debt, fund renovations or meet other financial goals.
However, a cash-out refinance typically has slightly higher rates than a traditional refinance. Also, most lenders require you to have at least 20% equity in your home to qualify.
Tip: To calculate your equity, subtract your loan balance from your home’s value. If you have a loan balance of $300,000 and your home is worth $400,000, you have $100,000 (or 25%) in equity. You may be able to borrow up to 85% of your available equity, or about $85,000 in this case.
Is refinancing my mortgage worth it?
A mortgage refinance calculator can help you estimate your new payment and determine your break-even point — how long you would have to stay in your home to recoup the refinance closing costs.
But there are other things to consider, including your goals for the new loan and the refinance terms. If your primary goal is to reduce your interest, then rates need to be lower than when you first took out the loan. With interest rates reaching highs not seen in decades, finding lower rates in the current environment isn’t likely.
On the other hand, if your objective is to reduce your monthly payment, extending the term even at a higher rate could make the loan more affordable. This would increase the total amount paid over the loan term, but you may decide it’s worth it for lower monthly dues.
Frequently asked questions (FAQs)
Closing costs paid to third parties, like appraisal fees and title insurance premiums, typically have no impact on your taxes. However, homeowners who pay discount points when refinancing can deduct the prepaid mortgage interest.
Remember that the deduction amount is spread over the loan term, and you can only deduct mortgage interest if you itemize deductions.
Borrowers who don’t have the cash for refinance closing costs may opt for a no-closing-cost refinance. Lenders who offer this option pay the settlement costs in exchange for charging a higher interest rate or rolling the fees into the principal.
Some lenders may offer lower-cost refinance options for low- and moderate-income borrowers.
Refinancing your loan may lower your credit scores initially. Lenders will perform a hard credit inquiry during the application process, which can temporarily drop your scores by about five points.
After closing, the refinance loan could lower your scores further because taking on new credit and the average age of your accounts affect your credit scores. The initial credit drop of a refinance loan can bounce back as the mortgage ages and you maintain a good payment history.
