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While refinancing your mortgage can help you secure a lower interest rate and save money, it’s important to be aware of refinance closing costs. Depending on the value of your home, you could end up spending thousands when you close on your new loan — so it’s good to be prepared and have a plan.
Here’s what you should know about the costs related to refinancing your mortgage:
- What are the refinance closing costs?
- Some common closing cost fees
- Can you get a no-closing cost refinance loan?
- How to avoid or lower some refinance closing costs
- How to know if refinancing is worth the cost
What are the refinance closing costs?
When you refinance your mortgage, you’ll have to pay closing costs. Closing costs are the associated fees and expenses you have to pay whenever you take out or refinance a mortgage. Closing costs are separate from the home’s purchase price.
In general, closing costs will be 2% to 5% of the total loan amount. The average closing costs on a refinance loan are approximately $5,000, according to Freddie Mac.
Learn More: What Is Cash-Out Refinancing?
Here are some common closing cost fees
If you’re thinking about refinancing your mortgage, here are some common closing cost fees to keep in mind:
- Loan origination fee: The lender will charge you a loan origination fee to process, underwrite, and close the loan for you. Expect to pay 0.5% to 1.5% of the loan amount. If the mortgage is $200,000, that means you should expect to pay between $1,000 and $3,000 in loan origination fees (sometimes called underwriting or processing fees).
- Appraisal fee: When you refinance your home, you’ll have to pay a property appraiser to evaluate your home to determine the current property value. Appraisers generally charge $300 to $500.
- Title insurance fee: You’ll need to purchase a new title insurance policy when you refinance in case there are errors with the ownership records. The cost on average is $1,000, but could be more or less depending on where you live and the loan amount.
- Credit report fee: Lenders will review your credit report to determine your creditworthiness for a new loan. Sometimes the lender takes care of this fee, but it might fall on you, so you should know what to expect. The credit report fee is typically between $30 and $50.
- Prepaid interest charges: Your refinancing lender might require you to pay the first month’s interest up front when you close on the loan. The exact amount you’ll have to pay will be based on your interest rate and when your loan closes.
- Recording fee: The mortgage transaction must be recorded with the county your home is in, but this cost varies.
- Mortgage points: Sometimes you can pay additional points or fees in order to get a lower interest rate. A “point” is equal to 1% of the mortgage loan amount, so if you had a $100,000 loan, a point would cost $1,000. The more points you pay, the lower the interest rate you’ll be offered.
|Loan origination fee||0.5% - 1.5% of the loan amount|
|Appraisal fee||$300 - $500|
|Title insurance fee||$1,000|
|Credit report fee||$30 - $50|
|Prepaid interest charges||Depends on your interest rate and when your loan closes|
|Mortgage points||Depends on how many points you pay for
(1% of your mortgage loan amount equals 1 point)
Can you get a no-closing cost refinance loan?
If you’re struggling to keep up with your current monthly payments or need to free up extra money for other expenses, refinancing your mortgage can be a smart strategy. But what if you don’t have thousands of dollars on hand to pay for closing costs?
There are companies that offer no-closing cost refinance loans. This means you won’t have to write a check for the closing costs at closing. Instead, the lender will roll the closing costs into the new mortgage loan amount, spreading out the cost over the life of the loan. Or the lender might provide you a lender credit, which works the same way as points, just in reverse. The credit covers the closing cost at closing, then the lender recoups the expense by charging you a higher interest rate on your refinanced mortgage.
If you’re shopping for a no-closing cost refinancing loan, make sure you compare multiple mortgage lenders. Besides the interest rate, pay attention to different lenders’ fees and added costs so you’re not caught by surprise at closing. Credible Operations, Inc. makes it easy to compare rates and more, so you can find the right mortgage refinance loan for your situation.
How to avoid or lower some refinance closing costs
To reduce your closing costs, follow these four tips:
- Boost your credit: To get the best rate possible, focus on improving your credit score and debt-to-income ratio before refinancing your mortgage.
- Negotiate fees: If you have solid credit and a steady income, you are in a strong position for negotiation. Ask the lender to waive certain fees, such as the origination fee, if applicable. If they agree, you could save hundreds.
- Stick with the same title insurance company: If you work with the same title insurance company that you used when you first purchased your home, you can save a significant amount of money on title fees. When you refinance, you could receive up to 40% off on your title fees.
- Skip paying for mortgage points: With mortgage points, you pay the lender to reduce your interest rate and monthly payment. But if you have good credit, you can qualify for a low interest rate without needing to pay for mortgage points, so you may be better off holding on to your cash, instead.
- Comparison shop for third-party fees: You can and should look for the least expensive options available for third-party services, which may include the title search, home inspection and survey, and more.
- Ask to waive the appraisal fee: If a property has been appraised fairly recently and prices have not significantly changed, a lender might be able to waive a new appraisal, potentially saving you hundreds of dollars.
How to know if refinancing is worth the cost
When you add up all of the fees and costs associated with refinancing your mortgage, you could be looking at paying thousands of dollars. So, how do you know if refinancing your mortgage is worth it?
Although this answer will vary depending on your unique situation, it really boils down to what you hope to get out of refinancing your home loan.
Here are two scenarios to consider:
- Refinancing to save money: If you’re considering refinancing to save money over the life of your loan — like 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.
- Refinancing to lower monthly payment: If you’re considering refinancing to make your monthly payment more manageable, it’s a good idea to weigh that convenience against the costs, as well. Add up your specific closing costs and make sure that, even with paying those, your lower monthly payment is still worth it. If the amount you would save each month ends up going toward closing costs anyway, it might not be the right decision for you.