It typically costs between 2-5% of the amount you’re borrowing to cover the closing costs of your refinance.
It’s usually on the lower end of that percentage range for bigger loans and higher for small loans.
For instance, a $300,000 refinance might come with $6,000 in closing costs, just 2%. But a $100,000 refinance could require $4,500 in costs — 4.5%.
According to the Federal Reserve Bank of St. Louis, the median sales price of an existing home in June 2020 was $295,300. So, if you wanted to refinance 80% of that ($236,240), your closing costs could range between $4,725 and $11,800.
Freddie Mac reckons most people end up paying around $5,000.Check your refinance rates. Start here (Nov 30th, 2022)
What determines refinance closing costs?
Part of it’s down to your choice of lenders. Some simply charge more for refinancing than others. That’s why we urge you so often to shop around for the best deal: you need to consider both refinance rates and closing costs.
And remember, you don’t have to stick with your current lender when you refinance. You’re getting a whole new mortgage and you can and should explore all your options in the marketplace.
Your closing costs could also depend on the type of loan you want. For example, cash-out refinances often incur higher closing costs and refinance rates.
But the type of refinancing is also a key factor. Some types of mortgage (FHA, VA, and USDA) allow you to “streamline” your refinance, which reduces both paperwork and costs. Although lenders are free to set their own procedures, with streamline refinances you may not even need a: Home appraisal Credit check Employment, or income verification
And that should save you a lot of money on closing costs. These streamline refinances are available only if you do not want to take cash out and you do stick with your existing type of mortgage. But you can still switch lenders.
Fannie and Freddie’s streamline-lite
Savings may be smaller but still worthwhile if you have an existing mortgage with either Fannie Mae or Freddie Mac. They both have refinancing products (the High Loan-to-Value Refinance Option and Enhanced Relief Refinance, respectively) that permit simplified documentation as well as allowing you to refinance a large proportion (roughly 97%) of your home’s market value.
But, again, these aren’t available if you need a cash-out refinance. And, for these, you must stay with Fannie or Freddie while being free to switch to a different lender.Check your refinance rates. Start here (Nov 30th, 2022)
Common mortgage refinance costs
Closing costs will vary dramatically depending on the specifics of your refinance.
Here are the fees and costs that those refinancing commonly incur:
- Origination or underwriting fee. 0-1% of the loan amount. What the lender charges for setting up the loan.
- Discount points. 0-2% of the loan amount. These are optional and allow you to purchase a lower mortgage rate. People who plan to keep their loan (and home) forever may choose to pay more money upfront to get a super low rate.
- Application fee. $300-500. These are rarer nowadays but you may still find them.
- Appraisal fee. Probably $400-$1,000 for an average property. Appraisal fees can be much more depending on the size and location of your property.
- Credit report fee. $20-$30. The cost of pulling your credit report.
- Flood determination fee. $20. This evaluates the likelihood that your property is susceptible to flooding.
- Flood monitoring fee. $40. This pays for continuing checks on flood-map updates.
- Tax monitoring and tax status research fees. $150-$225. This makes sure you stay current with property taxes.
All the above fees are determined by the lender.
But there’s another category that you have to pay but that you can shop around for. In other words, you get to appoint the supplier (or you can get the lender to do so), providing the company or person is appropriate. So you might make savings on:
- Pest inspection fee. $150.
- Survey fee. $50-$100.
- Insurance binder. $65-$70 for the binder itself. Be aware that other fees incurred in compiling it can add up to $700 or more.
- Lender’s title policy. $500-$700.
- Settlement agent’s fee. Can range from $800-$2,000. The cost is likely to vary hugely depending on services provided, city, purchase price and loan value.
- Title search. As low as $150 for a rudimentary tract search. But you could pay $1,000 or more for a full ownership and encumbrance report
All those cost estimates are necessarily vague. And, if you’re refinancing a big mortgage, you could pay a lot more. What we’re trying to do is give a feel for averages. In some states, you’ll also incur attorney fees.Check your refinance rates. Start here (Nov 30th, 2022)
What is a no-closing-costs refinance loan?
Anyone who says you won’t pay closing costs is stretching the truth a little but it is possible for you to avoid paying closing costs at closing (though you will have to pay them in the end).
Here are the two alternatives that are commonly available:
- The lender adds your closing costs to your mortgage balance. So you pay them back (plus interest) over the life of the loan, perhaps as long as 30 years
- Your closing costs disappear. But you have to pay a slightly higher interest rate on your refinance so the lender makes its money back over the years.
There’s just no such thing as a free home loan. But that doesn’t mean those alternatives are always a bad idea. Providing you work out how much they’ll cost you and make an informed decision, you can perfectly legitimately choose to take advantage of a “no-closing-costs” offer.
After all, you may not have that sort of money. Or, if you do, you may have better things to do with it. But it is part of the answer to our original question: How much does it cost to refinance a mortgage?
What’s the cost of resetting your loan term?
Refinancing very often means resetting the clock on your mortgage. Suppose you bought your home or last refinanced five years ago and chose a 30-year, fixed-rate mortgage (FRM). Now you want to refinance to another, similar, 30-year loan. You’ll end up paying for your home over 35 years: five on the old loan and 30 on the new one.
That’s great in some ways. The longer you have to pay back any loan, the lower each payment should be. And, in this case, you’ll be making 420 monthly payments (35×12) instead of 360 (30×12).
So those monthly payments will be lower, even if you were to refinance at the same mortgage rate. And the payments are likely to be even lower if you get a lower mortgage rate than you were paying previously.
The “But” here is inevitable. There’s always a downside. In this case, it’s that you’ll be paying interest on your mortgage for 35 years instead of 30 years. You may be paying less each month but you’re going to pay considerably more in the end.
Here’s an example:
Assume you’re purchasing a home with a starting loan of $250,000 at a rate of 4%. This chart illustrates how you’ll pay if you ride out the original loan, in comparison with the costs if you refinance the $222,000 balance at the five-year mark to a rate of 3.5%. Your monthly costs will go down but will be spread out over another thirty years, meaning you might end up paying more in the long run. In this case, refinancing would cost an additional $720 over the life of your loan.
|Years 30-35||$0 (paid off)||$59,820|
The trouble with amortization
This increased cost of your mortgage is made worse by something called amortization. Amortization determines how each of your monthly payments breaks down into interest and principal (the amount you borrowed). With a mortgage, nearly all of each monthly payment goes on interest in the early years. And that means your principal (mortgage balance) is reduced very slowly. In fact, you only start paying more principal than interest halfway into year-18 of a 30-year FRM.
Imagine you borrowed $273,886 five years ago. Your mortgage balance should still be $244,054 in year 5. Because you’ll have paid only $29,832 on your principal but a whopping $40,563 in interest.
When you refinance, the amortization clock resets along with your mortgage clock. And it will take you another 18.5 years to get to the point where you’re paying more in principal than interest. That’s a total of 23.5 years (18.5 on the new loan, plus five lost years on the old).
A mortgage calculator can help you see amortization in action. Put in your own figures, click “view full report” and all the details come up, including a brilliant amortization graph that proves that a picture paints a thousand words.
Minimizing the cost of refinancing
There’s a way to make refinancing much less expensive over the long term. But it often involves some short-term pain.
You can refinance to a shorter term. So, instead of getting a new 30-year FRM, you move to a 15-year or 20-year one. Some lenders pretty much let you pick your own term, so, in our example, a 25-year term isn’t out of the question.
Take this route, and you’ll pay way less interest over the lifetime of your loan and will be mortgage-free that much sooner. As an added bonus, a shorter-term loan typically comes with a lower mortgage rate.
The downside to a shorter loan term
It’s win-win-win. Except for another of those inevitable Buts. Your monthly payments are likely to be appreciably higher.
So reducing your loan term is generally an option only to those with healthy cash flows and plenty of spare money at the end of each month. They stand to make big savings on the cost of their borrowing.
For the rest of us, who find our household finances a continuing struggle, a refinance to a new 30-year term is usually our only choice. We have to prioritize making our monthly payments as affordable as possible over any long-term gains. And it’s fine to do that.Check your refinance rates. Start here (Nov 30th, 2022)
3 tips to lower your refinance costs
Here are three ways in which you can make your refinance less costly:
Think ahead and work on your credit score
A higher credit score is almost bound to earn you a lower mortgage rate. So work on yours in the months leading up to a refinance application.
Shop around with multiple lenders
Whatever you do, don’t ask just your existing lender for a refinance quote. Apply to several lenders, perhaps including your current one. Because both interest rates and closing costs (as we’ve already seen) vary wildly between them, you stand to save literally several thousand dollars by shopping around.
You will, by law, receive a loan estimate from those lenders to which you apply and that are willing to lend to you. These now come in a standardized format, meaning they provide the same information within the same layout. And that makes it exceptionally easy to compare them.
Don’t worry that applying to multiple lenders involves multiple hits to your credit score. Providing you make all your applications within a “focused period” (most seem to think that means two weeks), your score should take the same tiny hit that inevitably occurs whenever you apply for a new credit account. And it should normally recover very quickly, as long as you continue to follow all the usual rules.
Negotiate your refi closing costs
The closing costs and fees (sometimes even the mortgage rate) you see on loan estimates aren’t set in stone. Often, one of the biggest costs there will be the origination or underwriting fee, which is what the lender charges for setting up the refinance. And lenders may be willing to reduce theirs to win your business.
Armed with several loan estimates, don’t hesitate to call and tell lender #1 that lender #2 is offering a better deal because of x, y and z. Ask them to match or better lender #2’s deal. The worst that can happen is the loan officer says no. And you can keep playing one lender off against the others to your heart’s content.
If your home has been appraised recently and home prices in your neighborhood are fairly stable, also ask the loan officer to use that valuation. That could save you $300 or $400 on a new one if she agrees.
And don’t forget those suppliers we mentioned above that you are allowed to choose yourself. From pest inspection fees to title searches, you can appoint your own qualified suppliers and negotiate your own rates. The list of services you can shop for comprises section C on page 2 of your loan estimates.
Again, a few hours on the phone or online could give you a handsome return on that time in lower closing costs.
7 reasons to refinance
Have we made the costs and processes of refinancing sound daunting? It’s time to remind you of what those buy you. A worthwhile refinance could allow you to:
- Lower your mortgage rate. That helps to moderate your total cost of borrowing and also to…
- Reduce your monthly payment. Making your loan more affordable.
- Balance your household budget. A cash-out one can let you consolidate all your debts.
- Get spare cash. Invest, carry out home improvements or treat yourself, using funds from a cash-out refinance.
- Change your term. Save money in the long run by choosing a loan with a shorter term.
- Eliminate mortgage insurance payments. If you now have 20% or more equity in your home (its market value today is at least 20% higher than your current mortgage balance) you can switch your FHA loan for one that doesn’t charge PMI.
- Convert your loan type. You won’t get a streamline refinancing, but you can swap your current type of loan (Fannie, Freddie, FHA, VA, USDA, etc.) to one that makes more financial sense for you.
If you qualify for a great deal, there’s never been a better time to refinance.Check your refinance rates. Start here (Nov 30th, 2022)