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If you’re trying to save money on your monthly payments or pay off your home loan sooner, you’re probably considering refinancing your mortgage.
While refinancing may help you achieve certain long-term financial goals, the upfront cost to refinance a mortgage can get pretty pricey, with fees ranging from 2% to 6% of the loan amount. So why does it cost so much to refinance a mortgage? And what are you paying for when you refi? Let’s break it down.
What Affects the Cost of Refinancing a Mortgage?
The cost of refinancing a mortgage can vary by thousands – or tens of thousands – of dollars. These costs are determined by several factors, such as:
- The loan amount: Many refi costs are based on the size of the loan. A lender might charge a 1% origination fee, which can be significantly more expensive if you take out a $500,000 mortgage compared to a $300,000 one.
- The lender: Different lenders charge different fees. So your costs can vary based on the lender you choose to refinance with.
- Your credit score: Your credit score helps demonstrate to lenders how likely you are to pay back a loan, directly influencing the terms of your new mortgage – like the interest rate.
- Your home equity: If you refinance and have less than 20% equity in your home, you’ll have to consider the costs of private mortgage insurance (PMI). PMI varies depending on your loan amount and equity, but it can cost 0.2% – 2% of your loan amount annually.
- The type of mortgage: Different types of mortgages have different fees. For example, if you refinance to a Veterans Affairs (VA) home loan, you’ll have to pay a funding fee of 0.5% – 3.6% of the loan amount.
- The home’s location: Government recording fees, title searches and title insurance costs can differ based on your home’s location.
What Fees Can You Expect When Refinancing?
Whenever you close on a home loan, whether it’s for a new purchase or refinancing an existing mortgage, you have to pay closing costs. Closing costs are fees you pay in addition to the cost of the home itself. Check out the list below for some common closing costs associated with refinancing.
Common Refinancing Fees
To pay for the cost of underwriting and reviewing your mortgage application, some lenders charge a fee when you apply for a refi.
Lenders may charge borrowers origination fees to cover some of the costs of preparing and processing a new mortgage loan. An origination fee usually costs 0% – 1.5% of the loan amount.
Lenders use refinance appraisals to determine a home’s value before they agree to issue the new loan. Usually, refi appraisals cost $313 – $421 for a typical single-family home, but larger homes or more complex homes will likely be more expensive to appraise.
Most lenders require a title search and title insurance before approving a refi. This helps protect both your and the lender’s investments. The costs of a title search and title insurance vary by state and the home’s price. Usually, a title search will cost a couple of hundred dollars, while title insurance can range from under $1,000 to several thousand dollars.
Mortgage discount points help you reduce the interest rate on your loan by making an upfront payment at closing. For example, you might be able to lower your interest rate by 0.25% if you pay one mortgage point (equal to 1% of your loan amount) when you close on your refi.
Though it might seem like a raw deal at first glance, you might find the savings are worth the investment. If you pay one point ($3,000) on a $300,000 loan, reducing your interest rate from 7% to 6.75%, you’ll save $12,000 in interest charges over the course of the 30-year loan.
Miscellaneous charges on a refi might include recording fees, a credit report fee, flood certification fee and more. These fees tend to be relatively inexpensive, totaling a few hundred dollars at most.
Mortgage lenders are legally required to provide you a loan estimate within 3 business days after receiving your mortgage application. The loan estimate includes a detailed description of all costs and fees associated with your mortgage loan. Alternatively, if you just want to explore different refi options and potential costs, you can use Freddie Mac’s refinance calculator.
Reasons Refinancing Costs Could Be Worth It
Although refinancing can cost thousands of dollars, it may be worthwhile in the long run. Refinancing can help you:
Lower your interest rate
If you secure a lower interest rate, refinancing your mortgage could save you hundreds of dollars each month.
Say your current mortgage balance is $300,000, and you refinance from a 7% interest rate to a 5% interest rate. Your monthly savings would be $386. Over the course of a 30-year mortgage, that adds up to $138,960.
To determine whether a lower interest rate is worth it, you need to find the break-even point, which tells you how long it’ll take to recoup the closing costs on your refi. If your closing costs are $12,000 and your refi will save you $386 per month, your break-even point would be just under 32 months – since you’ll have saved a total of $12,352 with your new mortgage.
Switch to a different type of mortgage
Some homeowners refinance because they want a different type of mortgage. For example, if you have an adjustable-rate mortgage (ARM), refinancing can allow you to switch to a fixed-rate mortgage with predictable payments.
Another situation where you might consider refinancing is if you have a Federal Housing Administration (FHA) loan and want to get rid of your mortgage insurance premiums (MIP). If you took out an FHA loan and put down less than 10%, you’re obligated to pay MIPs for the life of the loan. Refinancing to a conventional mortgage – once you have at least 20% equity in the home – can help you save money by eliminating mortgage insurance.
Change your loan term
Sometimes circumstances change, and the loan term you originally chose is no longer the best option for you. Refinancing lets you replace your original mortgage term with a new mortgage term. So if you want to lower your monthly payment by spreading them out over 30 years instead of 15, you can refi to a 30-year mortgage. Alternatively, if your goal is to pay off your mortgage sooner and pay less interest overall, you can refi to a shorter term.
Turn your equity into cash
One of the perks of homeownership is that you build up equity in the property you own. If you want to make a large purchase, you can use a cash-out refinance to access your home’s equity. When you do, you’ll replace your old mortgage with a new one and get a portion of your home equity as a lump sum of cash. You can then spend that cash on whatever you want, like home improvements, paying off higher-interest debt or covering education expenses.
Ways To Lower Your Refinancing Costs
Refinancing can be pretty expensive up front. Fortunately, we have some tips to help you save.
Increase your credit score
Increasing your credit score also increases the likelihood of getting the best possible rate and terms on your new loan. There are several ways to boost your credit score, like paying your bills on time, having a good mix of credit and avoiding new credit inquiries in the year leading up to your refi application.
Compare multiple lenders
When you want to refinance your mortgage, shop around by comparing multiple lenders and their respective fees. Take your time to evaluate offers from different lenders and see how each one stacks up against the other.
Negotiate where you can
Though certain refi closing costs – like a county recording fee – are non-negotiable, you may be able to reduce other fees simply by asking. For example, if a lender charges an application or origination fee, ask them if they’d be willing to waive it. Even if they won’t waive it entirely, there’s a chance they’ll reduce the fee.
Consider a no-closing-cost refinance option
Sometimes, closing costs can be an obstacle that prevents homeowners from refinancing. If you don’t want to pay your closing costs upfront, a no-closing-cost refinance allows you to avoid paying thousands of dollars in cash when you swap your old mortgage for a new one.
Despite its name, the no-closing-cost refi still requires you to pay for certain services and fees in some form. The difference is that it gives you the flexibility to spread those expenses out over time by either rolling closing costs into your mortgage or opting for a higher interest rate throughout the life of your loan.
Refinance Your Mortgage With Confidence
Before you refinance, think about your long-term financial goals. Then, choose the type of refinance that’s most likely to help you achieve them. Refinancing can cost you several thousands of dollars up front, but it could help you save money in the long term, lower your monthly mortgage payment or pay off your mortgage sooner.
See your refinancing options
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The Federal Reserve Board. “A Consumer’s Guide to Refinancing Mortgages.” Retrieved January 2023 from https://www.federalreserve.gov/pubs/refinancings/
Experian™. “How Much Does Private Mortgage Insurance (PMI) Cost?” Retrieved January 2023 from https://www.experian.com/blogs/ask-experian/how-much-does-private-mortgage-insurance-pmi-cost/
U.S. Department of Veterans Affairs. “VA Funding Fee and Loan Closing Costs.” Retrieved January 2023 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
HomeAdvisor. “How Much Does An Appraisal Cost?” Retrieved January 2023 from https://www.homeadvisor.com/cost/inspectors-and-appraisers/hire-a-property-appraiser/
Federal Deposit Insurance Corporation. “FDIC Law, Regulations, Related Acts. 6500 – Consumer Financial Protection Bureau.” Retrieved January 2023 from https://www.fdic.gov/regulations/laws/rules/6500-3480.html
U.S. Department of Housing and Urban Development. “APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS.” Retrieved January 2023 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF