Refinancing your mortgage can be a strategic move to either lower your monthly payments, shorten your loan term, or tap into your home’s equity. However, did you know refinancing a mortgage can cost you? 

Now that you’re wondering, “How much does it cost to refinance a mortgage?” the short answer is, “It depends.” We’ll cover the long answer in this article. So, before you decide to start the process, it’s essential to understand the fees involved. From application fees to closing costs, this Redfin article will discuss everything you need to know to help make this financial decision.

What does it mean to refinance a mortgage?

What exactly does it mean to “refinance a mortgage”? Essentially, “refinancing,” means to finance once again or renegotiate the terms of one loan in lieu of another with better terms. There are several reasons you might want to do so like to lower your interest rate, change your loan term, your credit’s improved, debt consolidation, converting an ARM to a fixed-rate mortgage, converting an FHA loan to a conventional loan, or freeing up cash via decreasing your home’s equity. 

There are also several types of refinancing options like a traditional refinance, cash-out refinance, and existing client credit offer.

What do mortgage rates depend on?

The decision whether or not to refinance depends on several factors, but what do mortgage rates themselves depend on? Both personal and financial factors. Personal factors include the loan terms, credit score, debt-to-income ratio, and employment history. Financial and non-personal factors are the number of homes for sale, the state of the economy, unemployment rates, and inflation. Learn more about today’s mortgage rates.

Refinancing cost breakdown

The cost of refinancing a mortgage can differ greatly as certain fees like the origination fee and closing costs depend on the loan principal while others can depend on aspects like location. As a general rule, refinancing closing costs are typically 2-6% of the loan’s value. Before taxes, the average mortgage refinance is around $2,375 in closing costs. As for the other fees, we’ve included a breakdown of other costs you may run into when refinancing your mortgage.

Closing costs
Average cost
Things to note

Application fee
$75-300
Some lenders charge an application fee to process your refinance application

Origination fee
0-1% of the loan amount
This fee covers the lender’s costs for processing and underwriting the loan

Survey fee
if applicable)
$140-400
This covers the charge for conducting a property survey which provides an accurate map of your property’s boundaries

Appraisal 
$300-650
This is required to determine the current market value of your property, this is dependent on the property’s location and size

Credit check fee
$10-60
Lenders need your credit report

Title search/title services
Up to $250
This ensures there are no legal claims against the property and protects against future claims, this is dependent on location and the property’s value

Closing costs
2-6% of the loan’s value
This includes various fees like recording fees, transfer taxes, etc., these are dependent on location and transaction specificities 

Prepayment penalty
(if applicable)
Varies
Some mortgages have this for paying off your loan early

Escrow fees
$300-700
This covers the cost of handling funds during the closing process, like paying off the existing loan and disbursing new funds

Mortgage insurance
0.58-1.86% of the loan amount per year
This is the type of insurance that protects the lender in case the borrower defaults on the loan, there are four main types: PMI, FHA, VA, and USDA

Attorney/settlement fee
(if applicable)
$500-1000
You may need an attorney to review the closing documents, this is dependent on location

Recording fee
(if applicable)
$25-250 depending on location
This covers the cost for a government office or agency to officially record the details of the transaction in public records, this is dependent on location

How to lower the cost to refinance

Although this is what to expect when refinancing, there are some ways to lower the price.

Improve your credit score

One way to lower your cost is to improve your credit score. A higher score (of at least 780) will likely lower your rate and could even make the approval process easier. There are several ways to improve your credit score like paying your bills on time and minimizing your credit card balance. 

Shop around with multiple lenders and compare offers

Consider applying for loans with multiple lenders and comparing their refinance fees to get the best deal.

Negotiate costs

Similarly, try negotiating with the lenders; some fees can be reduced or even waived.

Consider refinancing with your bank or current lender

A good rule of thumb is to start with your existing lender as they may be more likely to waive or reduce some fees to keep your business. As for banks or credit unions, they sometimes will offer fees or discounts to incentivize current customers. 

Opt for a no-closing-cost refinance 

Some lenders offer a no-closing-cost refinance, meaning you’ll pay a small amount or nothing for the closing costs. Here, the lender recoups the closing costs by either charging a higher interest rate or rolling the fees into the loan principal, or both.

When to refinance your mortgage

While we can’t completely answer this question for you, there are some aspects besides cost to consider. It’s a good rule of thumb to consider refinancing if you plan to stay in a home for a while, and not if you’re thinking of selling in the coming couple of years. Other factors include your qualifications for a lower interest rate or if you want to change your term loan or type. If you’re still wondering if it’s time to refinance your mortgage, we have you covered in this article as well.

Whether you’ve decided to refinance your mortgage or have just thought about contacting your financial advisor to start the process, we hope we’ve properly prepared you and thoroughly answered the question, “How much does it cost to refinance a mortgage?”

The post How Much Does it Cost to Refinance a Mortgage? appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.