Refinancing can help you achieve certain financial goals, such as spending less money on your mortgage each month or making value-boosting upgrades to your home.
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Plan to pay between 3% to 6% of your principal in closing costs when you refinance.
Mortgage closing costs can include an application, appraisal, and origination fees, discount points, and more.
To spend less when you refinance, compare lenders’ fees or consider a no-closing-cost refinance.
Refinancing your mortgage can be a good way to save money. You might refinance to get lower monthly payments, and a lower interest rate could save you tens of thousands of dollars in the long-run.
Refinancing isn’t free, though. Just like with your original mortgage, you’ll pay closing costs. Before you commit to refinancing, figure out how much refinancing will cost and whether those expenses are worth it.
Reasons to refinance
When you refinance, you’re replacing your current mortgage with a new loan. Getting a new mortgage with a better rate or a different term can be financially beneficial depending on your goals and current market conditions.
These are some of the most common reasons homeowners refinance:
Get a lower rate: If mortgage rates are now lower than what you’re currently paying, refinancing into a lower rate can save you money each month and over the life of your loan.Change your term: Your mortgage term is the length of time it will take you to pay off your loan. Refinancing into a longer-term spreads out your payments over a longer period of time, so you’ll have lower monthly payments but you’ll also pay more in interest. Refinancing into a shorter term allows you to pay off your loan faster, saving you money on interest but increasing your monthly payment.Take cash out: Cash-out refinancing lets you tap into some of your home’s equity and turn it into cash. Borrowers often use this type of refinance to consolidate debt or pay for home improvement projects.Switch to a fixed-rate mortgage: If you currently have an adjustable-rate mortgage, switching to a fixed-rate mortgage before your rate resets can help you avoid taking on a higher rate and keep your rate locked for the life of your loan.Get rid of mortgage insurance: Depending on the type of loan and mortgage insurance you have, you might need to refinance to stop paying mortgage insurance after you’ve reached 20% equity.
How much it costs to refinance your house
Refinancing closing costs can range between 3% to 6% of your loan principal. That’s $3,000 to $6,000 for every $100,000 borrowed.
To see how the numbers break down, take a look at this chart:
FeeCostApplication fee$75 – $300Loan origination fee0% – 1.5% of principalAppraisal fee$300 – $700Inspection fee (if applicable)$175 – $350Attorney review/closing fee$500 – $1,000Homeowner’s insurance$300 – $1,000Title search and title insurance$700 – $900Survey fee$150 – $400
You may pay some additional fees, depending on certain factors:
Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your new mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5% and you pay $4,000 for two discount points, your new interest rate is 3%. You don’t have to pay for discount points when you refinance, but it’s an option.Prepayment penalties: A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years. The Federal Reserve states that prepayment penalties usually cost one to six months’ interest, but it varies by lender. Also, not all lenders charge this fee.Mortgage insurance: If you’re refinancing your conforming mortgage and don’t have 20% equity in your home, you’ll keep paying private mortgage insurance. The Fed estimates PMI to cost 0.5% to 1.5% of your principal. FHA mortgage insurance costs 1.75% at closing, plus an annual premium. You’ll pay between 0.5% and 3.6% for the funding fee to refinance a VA loan, and a 1% guarantee fee with a USDA mortgage.
4 ways to spend less on refinancing
1. Shop around for lenders
You can refinance with the same company that gave you your original mortgage, but you don’t have to. All mortgage lenders charge different fees, so pick your lender carefully.
Apply with your top three or four lenders and ask each for a loan estimate, which is an itemized list of fees that make up your closing costs. You’ll be able to compare how much you’d pay with each lender.
2. Get the lowest interest rate possible
Locking in a low interest rate won’t lower your closing costs. But it will bring down your monthly payments, which will help you earn back the money you spent more quickly.
Choosing the right lender is one way to lower your rate. You can also improve your credit score by paying all your bills on time or paying down your credit card debt. Paying down debts also helps you lower your debt-to-income ratio, which is another tool lenders use to determine your interest rate.
3. Negotiate
There are certain fees your lender probably can’t budge on, such as the appraisal cost — they have to pay the appraiser.
But lender fees, such as the application or origination fees, don’t require the lender to pay someone else. Ask your refinance lender if there is any leeway on these costs.
4. Look at a no-closing-cost refinance
A no-closing-cost refinance is just what it sounds like: You refinance your mortgage but don’t have to pay the usual closing costs when you close on the new loan.
This type of refinance helps you save money at closing, but you’ll still pay the money over time. The lender either charges you by rolling closing costs into the principal or by charging you a higher interest rate.
You will spend money when you refinance your home. Just be aware of what exactly you’re paying for and consider the best route for lowering your costs.