My Perfect Mortgage
Understanding the Costs to Refinance
6 minute read
August 30, 2023

Homeowners often choose to refinance in order to save money, as it frequently results in a reduced interest rate and monthly payment, potentially saving you thousands.

But once you take into account the cost of refinancing a mortgage, you may cost yourself more money than you’d be saving.

Refinancing typically involves closing costs averaging between 2% and 5% of the loan amount, which could result in thousands of dollars in fees.

The good news is that these costs can be negotiated, and with some careful planning, it's even possible to reduce the cost to refinance mortgages to nothing.

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Refinance closing costs

When you bought your home, you likely paid around 2-5% of your mortgage loan to close the loan. The percentage varies based on the loan amount.

A $100,000 mortgage, for example, could include closing costs of around $5,000 ( 5% of the loan). However, for a $500,000 mortgage, the closing costs would likely be closer to $10,000 (around 2%).

Closing costs for refinancing loans tend to have a smaller percentage. This is because certain fees, such as transfer taxes, and owner's title insurance, are not included.

Consequently, closing fees encompass charges from your lender, the home appraiser, the title company, and other third parties involved in the mortgage transaction.

Breakdown of cost to refinance a mortgage

Closing costs encompass nearly every upfront fee associated with buying or refinancing a home, with the exception of the down payment. All of these costs should be meticulously itemized on the standard Loan Estimate provided by lenders.

For refinancing a mortgage, these costs range on average from 2% to 6% of the loan amount and will likely include lender fees and third-party fees.

Here’s a breakdown of common closing costs that borrowers need to pay when refinancing a mortgage:

  • Loan origination fee or broker fee (up to 1% of loan amount): Charged by the lender or broker for their services, this fee covers lender overhead costs and contributes to their profit. It's often negotiable.
  • Mortgage points or discount points (up to 1% of loan amount): Optional upfront fees paid to lower your mortgage rate directly. These funds cannot be used for overhead or profit by the lender.
  • Processing fee or underwriting fee (about $300-$900 Each): This fee accounts for the mortgage application process, encompassing the costs of lender employees who collect documentation, collaborate with third parties such as appraisers, and meticulously review the loan file for approval.
  • Title search fee and title insurance (about $300-$2,500+): These fees validate historical records for any property liens and ensure a legal transfer of ownership.
  • Home appraisal fee ($500-$1,000+): Covers the assessment of the property's fair value or refinance value.
  • Home inspection fee ($300-$500): Paid to a licensed home inspector for evaluating the property's condition.
  • Prepaid taxes and insurance ($1,000-$4,500+): Typically covers advance property taxes and homeowners insurance for up to six months or a year at closing.
  • Survey fee ($150-$400): This mostly applies to original purchases only, but sometimes the lender might require a new survey to be done.
  • Application fee ($75-$300)
  • Credit check fee ($25)
  • Attorney / closing fee ($500-$1000): Sometimes required by state law
  • Recording fees ($25-$250): Depending on location

Disregard these ‘fees’ you would pay anyway

When evaluating the cost to refinance a mortgage, it's important to understand which expenses are genuinely new and which are simply transfers from your previous lender.

Prepaid taxes, insurance, and interim interest, while collected at closing, are often refunded to you by your former lender. Let's break down the numbers.

Examples of costs due at closing:

  • 6 Months of Taxes: $3,000
  • 12 Months of Homeowners Insurance: $800
  • 15 Days of Interim Interest (if, say, closing on the 15th): $750

In this example, though these expenses might seem to add up to $4,550, you should keep in mind that you would have been responsible for them under your previous mortgage agreement, regardless if you refinanced or not.

As a result, this amount essentially shifts from your old account to your new one.

Understanding these nuances will help you accurately gauge the true cost of refinancing, ensuring you make informed financial decisions and are better prepared for the process.

Get a refi quote. Start here.

Can you negotiate refinancing closing costs?

Fortunately, there is some positive news when it comes to refinancing closing costs.

In particular, certain fees charged directly by your mortgage company can be negotiated.

Let's take a look at the refinance expenses that can often be subject to negotiation:

  • Loan origination fees
  • Loan application fees
  • Underwriting fees
  • Homeowners insurance premiums (if you select cheaper policies and/or customize coverage)
  • Title insurance (again, shop for discounts or ask the title company to waive add-on items)

While there are certain expenses that cannot be negotiated, such as fees imposed by third-party entities like surveying, home appraisal, or recording, your loan officer is typically unable to reduce them. Lenders merely transfer these fees to you, the borrower.

Compare quotes from multiple mortgage lenders

When obtaining a mortgage, gather quotes from multiple lenders, including your current mortgage company. By comparing the estimates, you can identify the most affordable option.

Assessing upfront fees and interest rates will enable you to save money. Additionally, if you discover a lender offering lower loan origination, application, or underwriting fees, you gain negotiation power.

You have the choice to refinance with the lender providing the lowest rate and fees, or you may use your other offers as leverage for negotiation.

Your current lender may be willing to match the competitor's fees or waive certain refinance costs in order to retain you as a valued customer.

Can you refinance a mortgage with no closing costs?

Indeed, it’s possible to refinance a mortgage with zero closing costs.

A no-closing-cost refinance grants borrowers the opportunity to refinance their mortgage without the need for an upfront payment of closing costs.

Instead of paying cash during closing, borrowers can choose to include these expenses as part of their loan.

The hidden cost of no closing costs

A no-closing-cost refinance might entail higher interest rates, resulting in additional costs throughout the entire mortgage term.

Moreover, the fees may be spread out over the duration of the loan instead of being charged upfront. Certain lenders even offer a range of benefits, such as no application fees, no origination fees, no appraisal fees, and no requirement for cash at closing.

Is the cost to refinance mortgages worth it?

Ignoring the expenses associated with a mortgage refinance could lead to paying more than you save.

Also, be sure you will hold the mortgage at least long enough to pay for costs. For instance, if the refinance costs $3,000, make sure you save $3,000 in interest within two or three years.

If it pencils out, it’s time to start your refinance.

Get started here to discover the options available to you.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.