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Refinancing your mortgage into one with a lower interest rate could help save money over the life of the loan. But refinancing also costs money, so be sure to weigh the benefits against the expenses. (iStock)
If you’re looking to save money on your mortgage or to get more favorable loan terms, you may be interested in refinancing. How much it costs to refinance a mortgage depends on multiple factors. Understanding those factors could help you ensure that the benefits of refinancing your mortgage outweigh the potential costs.
How does refinancing work?
Refinancing involves taking out a new mortgage to pay off your original loan. If you already have a mortgage, you’ll have a good idea of what refinancing looks like because the process is very similar to taking out a mortgage.
To get the best deal, you’ll want to shop around with different lenders. Then, you can compare your best offers with your current mortgage to confirm you want to move ahead with refinancing. If you’ve improved your credit since taking out your first mortgage, you may find you get better terms and interest rates by refinancing.
Credible makes it easy to compare refinance rates from multiple mortgage lenders.
How much does it cost to refinance a mortgage?
When you refinance a mortgage, you’ll pay closing costs just as you did when you purchased your home with your original mortgage. Closing costs are typically 2% to 6% of your loan amount.
You’ll want to take these costs into account before refinancing, and make sure your new rate is low enough that you’ll still have long-term savings after paying closing costs.
Average closing costs are about $5,000, but this number can vary greatly and be influenced by the following factors:
- Size of your loan
- Your credit score and history
- Your existing loan’s payment history
- Employment history
- How much equity you own in the home
- Where you live (state and county)
- Current value of the home
- Debt utilization
Lenders look at these factors to determine how much risk you pose to them. The stronger these factors are, the better rates and terms you’re likely to get.
What are some common refinancing fees?
Fees contribute to the cost of refinancing a mortgage. Some common refinancing fees you can expect to come across include:
- Application fee: A refinancing application fee can cost anywhere from $250 to $500 and covers administrative costs. You can ask your lender to waive this fee.
- Origination fee: Generally, loan origination fees shouldn’t cost more than 2%. If your fee is higher than that, try to negotiate it down.
- Appraisal fee: Typically, home appraisal fees cost about $300 to $500. This fee tackles the expenses of hiring a qualified third party to determine your home’s fair market value, which is what qualifies the home for the new loan.
- Attorney fees: If a lawyer assists with the home closing, whether you or the lender hires one, they’ll have fees that get tacked on to your closing expenses.
- Title search fee: This fee covers the costs of a title search that confirms that your home’s title is free of any defects. This can cost about $500 to $1,000 if you work with a title company. Your lender may also require you to purchase title insurance.
- Survey fee: Properties that haven’t undergone a survey recently may need one before refinancing.
- Recording fee (depends on location): State and local government agencies have varying recording needs, but may require you to legally record your mortgage, deed and other important documents connected to your mortgage.
- Taxes: Property taxes can hit you hard when refinancing, but the costs of these vary based on the home’s value and location.
- Other settlement fees: During the closing process, other settlement fees can arise in order to secure the loan. These fees vary by location and lender, and they can be negotiated.
- Private mortgage insurance: If you have less than 20% equity in your home, your lender may also require you to purchase PMI, which protects the lender in case you default on the loan.
Finding a great mortgage refinance rate could help offset the cost of common closing fees. You can compare mortgage refinance rates at Credible.
Reasons to refinance a mortgage
You may refinance a mortgage for a number of reasons, including:
- Lower interest rates: Lower interest rates can save money over the life of the loan and can make monthly mortgage payments smaller.
- Rate type change: If you have an adjustable-rate mortgage, refinancing to a new fixed-rate mortgage will protect your monthly payment from market fluctuations.
- Tapping into equity: A cash-out refinance allows you to tap your home’s equity by refinancing into a loan that’s worth more than what you owe on your existing mortgage. Doing so will provide you with extra cash but result in a higher loan amount on the new mortgage, which may increase your monthly payments.
It’s worth noting that with refinancing, there is no guarantee that your new loan will come with better terms. Not only does your credit score play a big role in refinancing, but so do current market conditions.
Different types of refinancing
Homeowners most frequently pursue two types of refinancing:
- Rate-and-term refinance: If you’re looking for a lower interest rate, lower monthly payments, or a shorter term, a rate-and-term refinance loan might be right for you. You can also use this type of loan to make the switch from a fixed-rate loan to an adjustable-rate one.
- Cash-out refinance: If tapping into equity is your goal, then a cash-out refinance loan can make that doable.
How can I lower my refinance costs?
Unfortunately, there is no way to entirely avoid refinancing expenses, but you can take steps to lower yours.
Improve your credit score
The higher your credit score, the better loan terms and rates lenders are likely to offer. If you have time, try to improve your credit score before applying to refinance. A higher credit score may also help you qualify for reduced fees.
Comparison shop for mortgage offers
Before choosing a lender to refinance with, shop around to see who will offer you the best interest rates and loan terms. Also take into consideration how much each lender charges in fees. Credible can show you mortgage refinance rates and offers from multiple lenders.
Ask the lender to waive fees
Refinancing fees aren’t always set in stone. Try negotiating with your lender to either lower or completely eliminate its refinancing fees.
Consider a no-closing cost refinance
Some lenders will market their mortgage refinancing as "no-cost," which can help you avoid upfront costs. But it’s important to know that a no-closing cost refinance doesn’t get you entirely out of closing costs. Instead of charging you closing costs up front, the lender simply tacks them on to your mortgage amount or gives you a higher refinance rate.
Consider buying mortgage points
If your credit score is on the lower side, you can buy mortgage points to secure a better interest rate. Essentially, mortgage points are fees you can pay to get a lower interest rate on your mortgage. Often, mortgage points cost about 1% of the home loan amount, and they typically reduce the refinancing rate by just one quarter of a percentage point.