Refinancing your existing mortgage can provide many benefits, including a lower interest rate, shorter repayment term, and more manageable monthly payments. Converting an adjustable-rate mortgage to a fixed-rate mortgage can also provide more certainty to borrowers who are worried about rising interest rates. However, those benefits often come with extra fees and costs.
All of these potential benefits make refinancing a powerful tool. It’s easy to understand why homeowners refinanced $355 billion in mortgage debt in 2017, even with mortgage rates on the rise. Here, we discuss some of the most common fees and costs associated with refinancing a mortgage to help you prepare for the process.
How Much Does It Cost to Refinance a Mortgage?
The costs of refinancing a mortgage or home loan can vary pretty substantially from lender to lender and state to state, depending on their unique processes and requirements. That said, certain fees are more common than others. Here are some of the most common fees that homeowners may encounter during the refinance process.
Mortgage Application Fee
In most cases, a mortgage application fee is often paid by the borrower at the beginning of the mortgage refinancing application process, regardless of whether or not the refinance is approved. In addition to allowing the lender to recoup some of their expenses on loans that are not approved, this fee also discourages frivolous applications and allows lenders to focus on serious applicants.
Not all lenders charge an application fee. The exact amount charged will depend on the lender but can range from a low of around $100 to a high of a few hundred dollars.
Before agreeing to refinance a home, a lender will need to understand what the home’s current market value is, and this will require an appraisal by a licensed appraiser.
The exact cost of the appraisal will vary based on a number of factors, including the type of loan you are applying for, the size of the property, and whether the bank has an existing relationship with the appraiser. At a minimum, you can expect to pay at least a few hundred dollars in appraisal fees, and up to $1,000 or more for more complicated properties.
Whereas a home appraisal is meant to help the lender understand the market value of a property, a home inspection is meant to determine whether a property is structurally sound and liveable. This will typically involve inspecting the home’s wiring, plumbing, and structural integrity for issues, as well as looking for exposure to pests (like termites) and toxins (like asbestos or radon).
Home inspection fees, like appraisals, will vary based on the size of the home and the complexity of the property. Homeowners can expect to pay anywhere from a couple hundred to $500 or more for their home inspection.
Before moving forward with the refinancing process, lenders must conduct a title search. This typically involves the hiring of a title company to research property databases, court records, and past deeds, with the purpose of ensuring that a) the borrower owns the property that they are seeking to refinance and b) that there are no liens or claims against the property.
The cost of a title search can vary substantially from state to state and region to region but is usually a few hundred dollars.
If a home is located in a federally designated flood zone, then a lender will often require you to obtain flood insurance prior to agreeing to refinance. The process of obtaining flood insurance may require a flood certification (also called an elevation certification), which is used to determine the proper insurance premiums for a given property. The certificate must be completed by a state-licensed land surveyor.
Costs for flood certification will vary by state and locality, and can easily reach a few hundred dollars if the homeowner is paying for a surveyor. Homeowners should check with their municipal government or floodplain manager to see if there is already an elevation certificate on file for their property, as this can offer substantial savings.
Most lenders will require an official land survey of a property before they agree to refinance a home. This survey is used to mark the official boundary lines of a property. As with flood certification (above), this will require hiring a professional land surveyor.
Land survey costs will vary from state to state and county to county but typically will fall somewhere between $300 and $700.
Loan Origination and Document Preparation Fees
Also sometimes known as a processing fee, administrative fee, “points,” or underwriting fee, the loan origination fee is what lenders charge to evaluate, process, and prepare a mortgage or refinance. This is one of the primary ways (in addition to collecting interest) that a lender is compensated for processing a mortgage.
As a rule of thumb, you can expect their loan origination fee to be somewhere around 1 percent of the total loan amount, though exact amounts will vary by the lender. The loan origination fee is very often the largest fee that a homeowner can expect to pay while refinancing their mortgage.
Sometimes homeowners will agree to pay additional points or fees in order to get a lower interest rate. A “point” is equal to 1% of the mortgage, so if you had a $100,000 loan, a point would cost $1,000. The more points you’re willing to pay, the lower the interest rate you’ll typically be offered.
Some lenders who want to make their loans more attractive to investors may follow government guidelines for “Qualified Mortgages,” which limit upfront lender points and fees to:
To complete the process of refinancing, you will typically be required to pay a recording fee. This is the cost of making the loan a part of the public record for any given property. These fees are typically charged by state, county, or local governments, and can vary substantially by location.
Depending on the state, you may be required to have an attorney in attendance at the closing of their loan. Even if not required, you may want to consider having an attorney present to review the loan documents and ensure that the borrower understands the loan agreement.
Just be aware that working with an attorney involves additional costs. If you do decide to work with an attorney, fees are charged by the attorney based on the number of hours they work a case and can vary substantially from a few hundred to more than a thousand dollars.
How to Reduce The Costs of Refinancing Your Mortgage
With so many potential fees and costs associated with refinancing a mortgage, homeowners would be wise to look for ways to reduce their fees. Luckily, there are a number of strategies that you can use to save money while refinancing their mortgage:
How to Pay the Costs of Refinancing Your Mortgage
Most often, lenders will require that you pay the various costs associated with refinancing a mortgage upon closing. If you cannot afford to cover these fees out of pocket, asking for a no-closing-cost refinance may help you cope with the cost of refinancing.
If granted, you would not pay fees upon closing, but instead over the life of the loan. This would typically be realized through a slightly higher interest rate, or by rolling the fees into the loan’s principal, allowing the lender to recoup the cost of the fees over the life of the loan.
How to Know If Refinancing is Worth the Cost
When you add up all of the fees and costs associated with refinancing your mortgage, it is possible that you could be looking at paying thousands of dollars. And that begs the question: Is refinancing my mortgage worth it? The answer to that question will vary from person to person.
In the end, it all boils down to what you hope to get out of refinancing your home loan.
If, for example, you are considering refinancing to save money over the life of your loan—say, by getting a lower interest rate, or shortening your term—do the math to see how much money you’ll truly save after all of the fees and costs are accounted for. Find your break-even point, and work backward from there to figure out whether refinancing makes sense. If it will take you five years to break even, and you expect to sell your house before then, refinancing could end up costing you more than you would save.
Similarly, if you are considering refinancing to make your monthly payment more manageable, it would be wise to weigh that convenience against the costs.
Ultimately, only you can decide whether the positives of refinancing truly outweigh the costs.
The Bottom Line
You may decide to refinance your mortgage for any number of reasons, from looking to reduce your interest rates, shortening the term of your mortgage, locking in lower rates, or making monthly payments more manageable. Though refinancing can be a powerful tool, it is also important to remember that there are multiple costs involved. Whether the benefits outweigh the costs will depend on your unique motivations and financial situation.