How much does it cost to refinance a mortgage?
Quick insights
- The average cost to refinance a mortgage is typically 2% to 6% of the loan amount, depending on your mortgage lender and location.
- Borrowers may pay thousands of dollars in closing costs, depending on lender and third-party fees.
- Refinancing can lower your monthly mortgage payment or unlock cash, but you will need to stay in the home long enough to break even on upfront costs.
Refinancing your mortgage is a major financial decision. It can help you get a lower interest rate, shrink your monthly payment, change your loan type, or turn your home equity into cash. But just like buying your first home, refinancing has upfront costs. You need to know these costs to decide if refinancing is right for you. Let’s break down these expenses and how to calculate your break-even point.
Cost to refinance a mortgage
Closing costs are the main refinancing expense. The exact amount varies by lender, but it’s usually about 2%–6% of your loan amount. For example, if you’re taking out a $200,000 loan, you could expect to pay $4,000–$12,000 in closing costs. Refinance closing costs will vary depending on your lender, loan amount, loan type, credit score and more. With the help of our mortgage refinance calculator, you can get an estimate of how much your refinance may cost.
Here are the most common expenses:
Lender fees
- Loan application fee: This pays for processing your request and checking your credit. The cost typically ranges between $75-$500 and may be rolled into the origination fee.
- Origination fee: This is what the lender charges to create, process and underwrite your new mortgage loan. Rather than a flat fee, the industry standard is about 0.5-1% of the loan amount, depending on the lender and loan.
- Mortgage discount points: You may be able to buy points at closing to lower your interest rate.
Prepaid costs
- Mortgage insurance: The type and cost will vary based on a few factors, including your loan type, credit score, home value and more. If you have over 20% equity in the home and refinance to a conventional loan, you typically won’t owe mortgage insurance.
- Property taxes: These may need to be paid at closing, depending on your lender and escrow setup. You may need to fund an escrow account several months in advance. Taxes vary most by location and property type.
- Interest adjustments: This is any interest you prepay at closing. It covers the interest that accrues between your closing date and your first mortgage payment, which is usually more than one month after closing. The cost varies by your loan size, interest rate and the number of days between the two dates.
Third-party fees
- Home appraisal: This assesses the value of your home based on property condition and economic factors, such as comparable home sales. The appraised value helps determine the terms of your refinance. Even if you recently purchased the home, a new appraisal is generally needed to refinance. Appraisals typically range from $300 – $500.
- Attorney fees: In some states, an attorney must oversee the closing and relevant documents, ensuring the transaction is legal. Fees range depending on your location and the complexity of the refinance.
- Title search and title insurance: A property title search confirms legal ownership of the property and checks for liens or claims. Title insurance protects both you and the lender against future disputes over ownership. Title-related services can be hundreds or thousands of dollars, based on your loan amount and mortgage provider.
How to lower the cost of refinancing
The total cost to refinance a mortgage can vary widely based on your credit profile, mortgage type, loan term, location and lender. Here are some ways to potentially lower costs:
- Improve your credit score: A better credit score can allow you to qualify for better interest rates, decreasing your overall lending costs.
- Shop mortgage lenders: You don’t need to use the same lender that issued your original mortgage when refinancing. Comparing lenders can help you find one that charges lower fees or competitive terms.
- Time your closing strategically: Closing later in the month reduces your prepaid interest. For example, closing on April 25th means you only prepay 5 or 6 days of interest, compared to 25 days if you close on April 5th. This keeps more cash in your pocket at closing.
Can you refinance with no closing costs?
Yes, you may be able to refinance without paying closing costs. Some lenders allow you to roll the costs into the loan, pay a higher interest rate or use some combination of both. This approach may save money in the short term but doesn’t avoid closing costs altogether. When refinancing a mortgage, it’s important to clarify your goals and calculate your break-even point.
Cost-savings analysis: Evaluating the refinancing break-even point
Your break-even point is the exact time it takes for your monthly savings to equal your upfront closing costs. To find it, divide your total closing costs by your monthly savings.
For example, imagine refinancing lowers your payment from $2,200 to $1,950. That saves $250 a month. If your closing costs are $7,000, divide 7,000 by 250. The result is 28. It will take 28 months (two years and four months) for your savings to cover your costs. Knowing this break-even point can help you plan for the future.
Is refinancing worth it?
Refinancing a mortgage can be a helpful financial move, but it depends on your goals, plans and loan terms. Refinancing can serve different purposes, from lowering your mortgage payments to accessing equity or changing the loan structure.
When refinancing might make sense
- Lower your monthly mortgage payment: A rate-and-term refinance could secure a lower interest rate or adjust your loan term so that your monthly payment goes down.
- Remove mortgage insurance: If you have an FHA loan, refinancing into a conventional loan once you have sufficient equity can eliminate monthly mortgage insurance premiums (MIP). Based on your down payment, MIP may continue for the first 11 years or the life of the loan.
- Switch loan types: Refinancing from an FHA loan or VA loan into a conventional loan can change insurance requirements, adjust eligibility terms or improve long-term payment flexibility.
- Protect against rising rates: If you have an adjustable-rate mortgage, refinancing into a fixed-rate loan keeps your payments stable.
- Access home equity: A cash-out refinance allows you to borrow against your home’s equity to get a lump sum of money while keeping a single mortgage.
When refinancing may not make sense
- You plan to move before reaching your break-even point on closing costs.
- A rate-and-term refinance only offers a small improvement in interest rate or monthly mortgage payment.
- The upfront cost of refinancing outweighs long-term savings.
- Extending your loan term would significantly increase total interest paid.
- You don’t qualify for better loan terms than your current FHA, VA or conventional loan.
In summary
You might see many different reasons to refinance your mortgage. Whatever your reason, there is research to do and calculations to make. In most cases, learning the costs and calculating your break-even point can help you see the complete financial picture.
If you’re ready to take the next step in your refinancing journey, get started with us today.
