UPDATED: April 20, 2022
When you think about refinancing a mortgage, you probably see green. Saving money on interest is one of the most common reasons why homeowners want to refinance. But before you mentally spend your interest savings, it’s critical to understand how much it actually costs to refinance a mortgage when all is said and done.
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What is a Mortgage Refinance?
Refinancing a mortgage simply means turning in your existing mortgage for a new one, often with more favorable rates. And while locking in a refi that will save you 1-2% over the life of your loan is incredibly appealing, you’ll still be taking out a new mortgage, and that means you’ll need to pay for it.
You’ll be responsible for covering associated closing costs, as with your first mortgage. And while these may seem minor compared to how much you’ll save, they can add up quickly and might be more than you thought.
How Much Should I Expect to Pay for a Refinance?
The cost of a refinance is closely tied to the size of your loan. On average, you can anticipate paying between 2-6% of your total loan amount in closing costs. If the mortgage you’re refinancing is $250,000, you can expect to pay anywhere between $5,000 and $15,000 in closing costs.
What are Closing Costs to Refinancing a Mortgage?
Closings costs may consist of various fees, including:
- Loan origination fee: This fee covers the process of underwriting the loan for your new mortgage and generally costs around 1% of your total loan amount.
- Prepaid interest: If applicable, your mortgage lender may require that you pay the first month’s interest upfront. Depending on your interest rate and loan size, this amount can vary dramatically.
- Appraisal fees: You may be required to call in an appraiser to assess your home’s current value. If your home has increased or declined in value, the new mortgage must appropriately reflect that. Appraisal fees typically come in around $300-500.
- Title insurance: You’re required to have a title insurance policy to protect you from errors in the ownership records for your home. Title insurance can run you several hundred to several thousand dollars.
- Mortgage points: If you’d like to further lower your interest rate, you can purchase what’s called a mortgage point or discount point. These are entirely optional and generally cost about 1% of your loan for a single point. That means if you’re refinancing into a $200,000 mortgage, buying a point to lower your interest rate by 1% would cost you $2,000.
Are There Ways to Avoid Closing Costs?
It can be challenging to avoid closing costs entirely. Someone has to get paid to do the legwork of establishing the new loan, after all. But there may be options to lower specific fees.
- Consider a no-closing-cost refinance: The first option if you absolutely cannot afford to pay the closing costs out of pocket is to find a company that will enable you to roll the fees into the loan instead. These are referred to as “no-closing-cost refinance loans.” Be cautious with this option. You aren’t off the hook for paying closing costs. It simply means instead of paying out of pocket up front, the cost of the refinance is going to either be rolled into:
- The principal of your new mortgage
- A higher interest rate
Each of these outcomes would likely cause your monthly payments to increase.
- Negotiate with your title insurance company: Another place where you may be able to save on closing costs is on title insurance. Many companies will offer a discount for returning customers. So if you had a good experience with your first title insurance vendor, see if they’ll cut you a break for the repeat business.
- Ask your bank for help with costs: Especially if you’ve been a long-time customer, your bank or credit union will likely want to retain your business. Request that they waive, or pay, some closing costs on your behalf. If they say no, see if you can get a better deal elsewhere.
When is a Refinance Worth it?
A general rule of thumb is that if you can lock in an interest rate that’s 2% lower, you’ll want to refi. But that’s not always the case. And in certain circumstances, it can be worth it to refinance for less.
The most critical element to consider is how long you plan to stay in your home. If you’re looking to sell in the next few years, the closing costs associated with the refinance may prove more expensive than what you’d save.
To figure out the exact point in the future when paying for a refinance becomes worth it, you’ll want to calculate your break even point. This calculation will show when your savings will recoup what you laid out for the refi and when you’ll start seeing money in your pocket. There are great calculators available online to assist in figuring out when that happens.
In addition to saving on interest, a refinance could also be beneficial if:
- You’re moving from an adjustable-rate mortgage (ARM) to a fixed rate. An ARM can fluctuate based on the market, leaving you on the hook for a spike in interest rates. If you’re looking to take advantage of a stable fixed-rate mortgage, a refinance could be a smart way to do so.
- You’re interested in moving to a shorter-term mortgage. If you’re currently in a 30-year term and want to move into a 15-year fixed-rate mortgage, you may be able to pay off your loan faster, save boatloads in interest, and be debt-free sooner by refinancing. Here are the differences of a 15 vs 30 year mortgage.
Does Refinancing Hurt Your Credit?
A refinance is simply a replacement of a current loan that will be for roughly the same amount. For this reason, it’s unlikely you’d see any negative implications on your credit score.
The Bottom Line
In the right circumstance, a mortgage refinance can save you a nice chunk of change over the life of a loan. But it’s essential to weigh the underlying costs of a mortgage refinance against how much you’ll save and, most importantly, how long it will take to recognize those returns.