What is the cost of refinancing your mortgage?
Refinancing your mortgage can potentially save you thousands of dollars. However, similar to obtaining a new home loan, refinancing comes with associated closing costs that can impact your immediate and long-term financial situation.a
The cost of refinancing a mortgage typically falls within the range of 2% to 6% of your total loan amount. Generally, the closing costs for a refinance are lower than those for a new purchase loan. The specific amount you will pay depends on various factors, including:
The size of your loan
The lender you choose
Your geographical location
Your credit score
The amount of equity in your home
The term of your loan
The type of mortgage (fixed-rate or adjustable-rate)
The specific mortgage program you select
The type of property you own
Your occupancy status
Before proceeding with a refinance, it's essential to evaluate the closing costs versus the potential long-term savings.
Common fees associated with mortgage refinancing are detailed in the following table:
Type of Fee | Amount |
Application Fee | $75 to $500 |
Origination Fee | Up to 1.5% of the loan amount |
Credit Report Fee | $10 to $100 per applicant |
Document Preparation Fee | $50 to $600 |
Home Appraisal | $225 to $700 |
Home Inspection | $300 to $500 |
Flood Certification Fee | $15 to $25 |
Title Search and Insurance Fee | $400 to $900 |
Recording Fee | $25 to $250 |
Reconveyance Fee | $50 to $65 |
Mortgage Insurance | Conventional Loans: 0.15% to 1.95% annually |
| FHA Loans: 1.75% upfront, 0.15% to 0.75% annually |
| VA Loans: 0.5% to 3.6% upfront VA funding fee |
| USDA Loans: 1% upfront guarantee fee, 0.35% annual guarantee fee |
When is refinancing worthwhile? Before committing to a refinance, it's crucial to determine whether it makes financial sense for your situation. Calculate your "break-even point" by dividing the total closing costs of your refinance by your estimated monthly savings. This calculation yields the number of months required to recover the costs.
For example, if a refinance saves you $500 per month but costs $10,000 in closing expenses, dividing $10,000 by $500 results in 20 months. In this scenario, it would take just over 1.5 years of staying in your home to justify the refinance.
Five reasons to consider mortgage refinancing are as follows:
Lower Your Interest Rate: Reducing your mortgage rate leads to lower monthly payments and reduced lifetime interest expenses. If your credit score has improved, you might qualify for a lower rate.
Change Your Loan Term: Adjust your mortgage term to pay off your loan faster or extend it for lower monthly payments.
Tap Your Home Equity: Utilize a cash-out refinance to improve loan terms and access available home equity for financial goals like home improvements or education expenses.
Convert an ARM to a Fixed-Rate Mortgage: Transition from an adjustable-rate mortgage to a fixed-rate loan for predictable monthly payments.
Convert an FHA Loan to a Conventional Loan: Eliminate mortgage insurance premiums by refinancing into a conventional loan if you have sufficient equity.
To reduce your refinance costs:
Step 1: Improve Your Credit Score: Aim for a credit score of at least 780 to secure the best rates and terms. Pay bills on time, reduce credit card balances, and correct any credit report errors.
Step 2: Negotiate Fees: Don't hesitate to negotiate certain fees, such as application or origination fees, with your lender.
Step 3: Shop Around: Compare refinance rates and fees from multiple lenders to ensure you're getting the best deal.
Step 4: Consider a No-Closing-Cost Refi: If you can't cover upfront costs, inquire about a no-closing-cost refinance, but be aware that it may come with a higher interest rate or added closing costs spread over the loan term.