How much does it cost to refinance a mortgage?
Deciding whether or not to refinancerefinance-hl000061 is an important decision to make if interest rates fall. You’ll need to take into account the cost of refinancing. Regardless of what type of refinance you opt for, you’ll likely owe closing costs again.
Let’s take a closer look at what goes into refinancing closing costs. We’ll also cover how to calculate your break-even point, so you understand when refinancing might be worth it.
How much does refinancing cost?
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.
But what exactly makes up closing costs? Here are some expenses that are likely to make an appearance:
- Loan application fee: A charge imposed by a lender to process a borrower's application for a loan. Depending on the lender, this fee may be included as part of the origination fee.
- Origination fee: Fee that covers the full cost of processing and underwriting a loan, usually charged when the loan closes. The industry standard is 0.5%–1% of the loan value. While similar to the application fee, it is different. Although lenders can be flexible in how they negotiate the two.
- Mortgage insurance: The type and cost of insurance will vary based on a few factors, including your loan type, credit score, home value and more. This is not the same as hazard insurance, which you’ll likely need to close on your loan. If you have over 20% equity in the home and refinance to a conventional loan, you won’t owe mortgage insurance.
- Home appraisal: A professional appraiser will come and assess the value of your home based on objective data and subjective factors. This will help determine what a lender can do for you. Even if you recently purchased the home, you may need a new appraisal to refinance. Appraisals typically range from $300 – $500.actor-portrayal-HL000129
- Mortgage discount points: You can choose to buy mortgage points at closing for a reduced interest rate that can help save you money long term. You can also choose to pay higher mortgage points as part of premium or par pricing to offset the cost of paying for 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 calculatortools-and-calculator-hl000066, you can get an estimate of how much your refinance may cost.
No closing cost refinance
It may be possible to refinance without paying closing costs. Some lenders allow you to roll these costs into the loan, charge a higher interest rate or some combination of both. In return, you secure a new loan without the upfront cash commitment.
This approach will save you in the short term but will cost you over the life of the loan. This is why it’s important to be clear on your goals with refinancing and to understand your break-even point.
Mortgage refinancing break-even point
If your refinance results in a lower mortgage payment, it’s easier to determine at what point the costs will be worth the investment. You can do this by calculating your break-even point, which is when your total savings exceeds the closing costs you paid. It may be easier to understand this concept with an example.
Let’s say refinancing lowers your monthly mortgage payment from $2,200 to $1,950 per month. That’s $250 in savings each month, which can make quite a difference to your monthly budget and over the life of the loan. However, to properly calculate your savings, you need to account for your closing costs. In this example, we’ll say refinancing closing costs were $7,000.
To calculate the break-even point, divide the closing costs by your monthly savings. In this case, that’s 7,000 ÷ 250 = 28. Your monthly savings will take 28 months, or two years and four months, to match your closing costs.
Knowing your break-even point allows you to calculate exactly when you’ll come out ahead with a refinance, which can improve your long-term planning.
When is refinancing worth the cost?
Refinancing your mortgage is common in the world of homeownership, and there are different reasons why people do it. Here are the ones that typically make the most financial sense.
1. Lower your monthly payment
This is one of the most common reasons to refinance. Also known as a rate and term refinance, refinancing to take advantage of lower interest rates can lower your monthly payment and save you thousands over the life of the loan. Just remember to calculate your break-even point so you know how long it will take to see true savings.
2. Change your loan type
Different types of mortgages come with specific rules and costs. For example, Federal Housing Administration (FHA) loans include a monthly mortgage insurance premium (MIP) that usually lasts the life of the loan. In contrast, the insurance requirement for conventional loans falls off after a certain amount of equity has been built. Homeowners commonly pursue refinancing from an FHA loan to a conventional loan to eliminate the MIP payment.
3. Alter the interest structure
Adjustable-rate mortgages (ARMs) offer variable interest rates. Usually, they’re structured so you’ll pay a lower interest rate earlier in the loan term. Eventually, that rate will increase. When and how much will depend on the specifics of your loan and lender.
Another common reason mortgage holders refinance is to change from a variable interest rate to a fixed interest rate, especially before the new and higher rate kicks in.
4. Access your home equity
Ideally, your home will increase in value over time. Cash-out refinances allow you to borrow against your equity without selling your home. This happens for various reasons, from debt consolidation to home improvements and investment opportunities.
5. Change the length of the loan
Another important reason homeowners refinance is to either shorten or extend the length of their loan. Lengthening the loan term lowers monthly payments, but you’ll pay more in interest over the life of the loan.
Conversely, shortening the loan term will increase your monthly payments, but you’ll save a significant amount in interest over time. These refinances can accompany a dramatic change in circumstances, like if you received a promotion that drastically increases your income.
Tips for lowering mortgage refinancing costs
Here are some practical steps you can take that could lead directly to lower costs:
- Improve your credit score: A better credit score can allow you to qualify for better interest rates, decreasing your overall costs.
- Shop mortgage lenders: You don’t need to use the same lender that issued your original mortgage when refinancing. Comparing lenders can alert you of promotions they may be running or help you find a lender that charges lower fees.
- Negotiate fees: Some lenders may be willing to negotiate origination fees or even waive certain ones, such as administrative fees. This happens case-by-case, but you can’t get a deal without negotiating.
In summary
There are many different reasons to refinance. Whatever your reason, make sure to do your due diligence beforehand. And if you’re trying to save on your monthly payment, calculate your break-even point so you have a handle on the complete financial picture.
If you’re ready to take the next step in your refinancing journey, get started with us today.
