How Much Does It Cost to Refinance a Mortgage?

Average Refinance Closing Costs, “No Cost” Refinancing, and More

Refinancing allows you to replace an existing mortgage with a new loan. While refinancing can have many benefits, there is a cost to refinance your loan. You should take the upfront closing costs and fees into account when deciding if refinancing your mortgage is the right financial move for you.

This guide will explain typical refinancing costs, along with some tips on how to keep those costs down and how to know when the cost of refinancing makes sense in your situation.

Cost To Refinance Mortgage

When you got your first mortgage, you may remember that you paid closing costs and fees. These were costs associated with the borrowing process and closing the loan.

While there are many reasons to refinance a mortgage, many people do so to save money with a lower mortgage payment. Paying refinancing closing costs might seem like a bad idea when your goal is to save money. However, it's a good idea when the total saved by the refinance is more than the cost to refinance. In fact, by reducing your total borrowing costs over time, you might be able to save a lot of money with a refinance.

What Are Some Common Refinance Fees?

How much does it cost to refinance a mortgage?

There's no single answer to that question because it can depend on many factors including the size of your loan, your lender's policies, and your overall financial situation.

Here are some of the typical costs to refinance mortgage loans.

Different lenders charge different refinance mortgage costs. That's one key reason why it makes sense to compare loan offers and lenders when you want to refinance your mortgage.

What Factors Influence Refinance Costs?

While the table above shows typical costs to refinance, your own specific costs are going to be what matters most to you.

It's helpful to understand how they are calculated, and what influences your cost to refinance your mortgage. Here are the key factors that will affect your costs and fees:

• Type of refinance loan: Different types of mortgage refinance loans come with different refinancing costs. For example, an FHA streamline refinance loan may not need an appraisal, while most conventional loans will require one.
• Loan amount: Some closing costs, such as title insurance and origination fees, are usually based on a percentage of your loan amount. This (and other factors) is why larger mortgages have higher closing costs.
• Lender policies: Lenders may have different origination fees and application fees. Your costs may vary based on your lender.

Lenders should provide a personalized estimate of the cost to refinance mortgage loans before you agree to move forward in the application process.

Understanding Your Break-Even Point

One very important thing to understand about the cost to refinance a home loan is your "break-even point." That's the point when your savings on your loan reach your total refinancing costs.

You can calculate your break-even point by:

• Estimating the upfront and total costs to refinance your loan.
• Determining how much you will save each month due to refinancing
• Dividing the cost to refinance by the monthly savings.

Let's look at a simple example.

• If you pay $2,000 to refinance and you save $75 per month, you'd calculate your break-even point by dividing $2,000 by $75.
• It would take you 26.7 months or a little over two years to break even.
• If you plan to keep your loan for at least that long, refinancing would be worth it. After 27 months, your $75 monthly savings is money that stays in your pocket for the remaining years of your loan.

If you are likely to move or refinance again before your break-even point, then you should probably not refinance.

3 Ways to Lower Refinance Costs

Now you can answer the question of how much it might cost to refinance. The next key thing to understand is how to reduce your upfront and total refinancing expenses.

Here are a few key ways you may be able to save money when you refinance.

1. Boost Your Credit Score

A better or higher credit score makes you eligible for the lowest possible rates and potentially lower closing costs

You can improve your credit by removing incorrect information from your report, improving your credit utilization ratio by repaying your debt, or even asking creditors to remove negative information on your report as a gesture of good will when you pay them back.

2. Browse Lenders and Offers

Different lenders may charge different fees. You should always shop for a combination of the best mortgage rate and the best loan terms.

As you compare options, look at the total cost of borrowing and pay particular attention to your mortgage APR (annual percentage rate). APR reflects the true cost of borrowing the money and includes closing costs and fees. But also remember that you want to choose a trusted and experienced lender to avoid unexpected problems or delays.

3. Consider a No Closing Cost Refinance

Some lenders offer "no closing costs" refinance loans. This means you don't pay these costs up front.

It doesn't mean you don't pay any closing costs and fees though. You typically pay some of them in the form of a slightly higher interest rate. Or, your lender may roll closing costs into your principal balance. This means you pay these costs over the life of the loan and not upfront at closing.

Mortgage Refinancing Qualifications

Making sure you can comfortably afford the cost to refinance a home loan is important before you decide to refinance. Lenders also set other requirements to refinance your mortgage and approve you for a loan as well.

Here are some of the common requirements that lenders put in place before providing a refinance loan:

• Credit score: Credit score requirements vary by loan type. While you may be eligible for an FHA refinance loan with a score as low as 580, you'll likely need a higher score for a conventional refinance loan.
• Debt-to-income ratio (DTI): Your debt-to-income ratio (DTI) compares your debt with your income. While some loan types allow refinance loans with a DTI as high as 45%, others require a lower ratio, typically in the 36% to 41% range.
• Equity in the home: Equity is the difference between the fair market value and the outstanding mortgage balance on your home. Lenders require some home equity to refinance, as most will not allow you to borrow 100% of what your home is worth (with the exception of VA loans).

The Pros and Cons of Refinancing

Upfront costs of refinancing are a disadvantage. However, there are still many benefits and good reasons to refinance your home loan.

Some of the biggest benefits include:

• You can potentially qualify for a lower interest rate to make your borrowing costs substantially cheaper
• You can reduce your monthly payment by lowering your rate, lengthening your repayment time, or both
• You can change your mortgage type, such as switching from an adjustable-rate mortgage to a fixed-rate mortgage for more stability in your budget
• You can take cash out of your home using a cash out refinance, which allows you to tap your home equity and borrow money at one of the lowest possible rates

Here are some of the biggest downsides:

• You will have to pay some upfront closing costs or finance those costs over time
• You may not be able to qualify for a better rate, depending on changes to your finances or to economic and current market conditions
• You could end up paying more total interest over time if you make your repayment period longer than it was under your current loan

You should carefully consider both the benefits and disadvantages when deciding if refinancing is right for you.

Closing Thoughts on the Cost to Refinance

• While there are almost always costs to refinance a home loan, paying these upfront (or other) fees is often worth it if you can get a new home loan that better meets your financial goals.
• If you are considering getting a new loan to refinance your mortgage and save money, a mortgage loan officer can help you understand if this option is right for you. Reach out to find out more and to get started on a refinance loan today.