Mortgage 101

How Much Does It Cost to Refinance a Mortgage?

Published on: December 8, 2021

Refinancing your mortgage is a way to reach certain financial goals. While refinancing can help lower your monthly payments, save on interest charges, and allow you to tap your home’s equity, among other things, there’s a cost to refinance your home loan.

You can expect to pay a percentage of your new loan amount in refi closing costs. However, these costs may be worth it, especially if you stay in your home long enough to recoup those expenses. 

Average cost to refinance a mortgage: Closing costs and fees explained

While you won’t know the exact cost of refinancing a mortgage until you apply for a mortgage refi, you can expect to pay anywhere from 3% to 6% of your new loan amount. According to Freddie Mac, the average cost of refinancing is $5,000. However, your final cost will depend on factors such as your location, loan amount, and what your lender charges.  

 You’ll find that many of the fees you paid for your initial mortgage are the same as the ones you’ll pay for a refinance. For instance, you’ll need to pay an origination fee, a home appraisal fee (unless you get the appraisal waived), and attorney fees, if applicable.  

Here’s a sample breakdown of common closing costs in a mortgage refinance. (Note: These are estimates; your actual refinance fees will vary based on your lender, loan type, loan size, location, and other factors.)

Type of fee  Average cost
Application  $75 to $300 
Loan origination    0% to 1.5% of loan amount 
Appraisal  $300 to $700 
Attorney/settlement  $500 to $1,000 
Title search/title insurance  $700 to $900  

Source: Federal Reserve

Let’s take a closer look at these fees: 

  • Application fee: You may be charged this fee to process your loan request and for the lender to check your credit report. You may still have to pay an application fee even if your loan is denied. 
  • Loan origination fee: This fee is for the lender to process and close on your loan.  
  • Appraisal fee: Some lenders require a new appraisal of your home to ensure its current market value is in line with your loan amount. In some cases, lenders combine the application and appraisal fee. Homeowners who’ve had a recent appraisal may be able to ask the lender to waive this requirement.  
  • Attorney/settlement fee: Fees paid to a real estate attorney or company to conduct the refinancing may be charged to you by the lender. 
  • Title search/title insurance fee: This fee covers the cost of searching property records to ensure accuracy. The insurance portion will kick in if there is a problem and the lender wants to recoup their investment.  
  • Survey fee: A survey is conducted to confirm where your building is located in relation to your property and whether there are any new structures or land improvements. Like an appraisal, you may be able to get this fee waived if you’ve recently conducted a survey.

Reasons to refinance: When is it worth it to refinance?

Most borrowers choose to refinance to lower their interest rates. There are also several other scenarios when it is worth it to refinance, including eliminating private mortgage insurance (PMI) and lowering the monthly rate.  

Lower interest rate

Refinancing to a lower interest rate can result in thousands of dollars or more saved over the lifetime of the loan, especially if refinance home loan rates are significantly lower than the one you currently have.  It also has the added benefit of lowering your monthly mortgage amount, assuming you refinance to the same term you have now. The amount you’ll save depends on the difference between your original loan amount and your new one. Use a refinance calculator to help you figure out how much you can save.  

Change loan term 

Shortening your loan term allows you to pay off your mortgage quicker, but it could come with a higher monthly payment. If you’re struggling with your monthly payments and want more breathing room in your budget, lengthening your loan term will lower the amount you pay each month. However, you could pay more in interest throughout the life of your loan by refinancing to a longer term, so factor that in when considering whether you should refinance 

Change loan type 

Refinancing can allow you to convert from an adjustable-rate mortgage (ARM) to a fixed rate, and vice versa. Most borrowers can save money on an ARM loan because it has a low introductory rate for the first few years, then fluctuates afterward, which could increase your rate higher than you’d like. Converting it to a fixed-rate mortgage offers homeowners consistency in knowing how much they need to pay each month.  

Eliminate PMI 

Those who have conventional mortgages may have to pay PMI if their home equity is less than 80%. If a lender does not allow you to cancel PMI, refinancing may be the only option. Borrowers who have an FHA loan will have to refinance to a conventional mortgage to get rid of their mortgage insurance payments.  

Tap into home equity 

Getting a cash-out refinance allows you to take out some of your home equity and take advantage of better interest rates and terms. Since you’ll be borrowing more than your original mortgage amount, you’ll get the difference in cash to use for most purposes, such as a home renovation or consolidating high-interest debt.

How much will refinancing save me?

You can save thousands of dollars over the lifetime of your loan if you get a lower interest rate or shorten your loan term. When determining whether it’s worth it, you want to take into account any estimated refinancing costs you’ll pay. 

You can use the breakeven point to see whether it makes sense to refinance. If you want to sell your home in two years but it’ll take you four years to break even, then the costs to refinance your home will add up to more than what you could save. 

To calculate your break-even point, determine how much refinancing will save you each month. Then divide the costs to refinance your mortgage by the amount you save — the result is how many months it will take to break even. You want to make sure you plan to remain in your home for longer than it will take to recoup the costs. 

For example, if you’ll save $300 per month with your new mortgage but will have to pay $6,000 in fees, your break-even point is 20 months ($6,000/$300). If you stayed in your home for at least that time, you’d recoup your costs and keep saving $300 each month starting on the 21st month, making the refinance worth the cost.

How to lower your refinancing costs

Here are some ways you can lower your refinancing costs: 

  • Raise your credit score: Focus on raising your credit score and lowering your debt-to-income ratio to help you qualify for a more competitive rate. Pay down your credit card balances and make on-time payments to help boost your score.
  • Negotiate refinance fees: You may be able to ask the lender to lower or waive some fees. It’s also worth seeing if your lender offers no-closing-cost refinance options, which allow you to roll closing costs into your loan amount or to take a higher interest rate to offset the lender covering the closing fees upfront.
  • Shop around: Comparing rates, fees, and terms with multiple lenders allows you to find the best options, helping you to save money and find the right loan program that suits your unique needs.

To find out more about your refinancing options, contact a local Finance of America Mortgage Advisor today.

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