You can get a lower interest rate, lower your monthly payments, or access your home equity by refinancing your mortgage. But before you refinance, you should know that you’ll probably have to pay closing costs. Here is what you need to know about the fees that come with refinancing your home.
What Are Closing Costs?
Closing costs refer to the fees charged by lenders and third parties to finalize and fund a new mortgage loan Just like when you originally bought your house, you’ll need to pay these costs when you refinance.
Most of the time, closing costs are between 2% and 5% of your loan amount. These costs include things like fee
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Loan origination fees – Charged by the lender to underwrite and process your new loan Usually 0.5% to 1% of the loan amount.
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Appraisal fee – The cost to assess your home’s current value. Ranges from $300 to $700.
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Title services – Verifying ownership and protecting against claims. Usually $700 to $900.
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Taxes and insurance – Prorated property taxes and prepaid insurance premiums.
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Recording fees – To file the new mortgage with local government. $25 to $250 depending on location.
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Credit report fee – Around $25 to $50 to check your credit.
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Mortgage points – Prepaid interest to lower your rate. 1 point costs 1% of the loan amount.
So on a $250,000 loan, expect to pay around $5,000 to $12,500 in closing costs when you refinance.
Do You Always Pay Closing Costs?
In most cases, yes – you will have closing costs whenever you refinance your mortgage. The lender and third parties involved need to be paid for their services.
But some lenders may offer “no-closing cost” refinancing, which means that the closing costs are either not charged or added to the loan amount.
With a no-closing cost refinance, you may get:
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A higher interest rate – Costs waived in exchange for a higher rate.
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Larger loan amount – Closing costs added to the principal balance.
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Lengthier loan term – Lower payments spread over more years.
While these options let you avoid closing costs upfront, you’ll end up paying more over the long run in interest. Carefully weigh the pros and cons before choosing a no-closing cost refi.
How Can You Reduce Closing Costs?
Here are some tips to lower your refinance closing costs:
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Shop around – Compare quotes from multiple lenders. Negotiate with them to reduce fees.
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Use lender credits – Ask your lender for credits to offset costs.
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Pay discount points – Prepay interest to lower your rate and overall costs.
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Refinance with your current lender – May waive certain fees for existing customers.
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Boost your credit – A higher score can qualify you for lower fees.
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Lower loan amount – The lower the amount, the lower your origination fees.
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Shorten loan term – Can reduce the total interest paid over the life of the loan.
Should You Pay Closing Costs Upfront?
Long-term, it’s better to pay your closing costs up front than to add them to your new loan or accept a higher rate. You will have to make a big payment at closing, though.
Run the numbers to see if paying costs upfront will provide enough interest savings to be worthwhile. If you don’t plan to stay in the home long, a no-closing cost option may be better.
Here are a few scenarios where paying upfront makes sense:
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You plan to stay in the home long-term
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You can afford the upfront costs
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Your new rate is at least 1% lower than your current rate
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Monthly savings exceed the upfront costs within a few years
Weighing Closing Costs vs. Long-Term Savings
The upfront cost to refinance can seem daunting. But if you secure a significantly lower rate, your monthly savings could outweigh the closing costs over time.
When deciding, consider:
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Your break-even point – How many months of savings are needed to recoup closing costs?
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Your timeline – How long do you plan on staying in the home?
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Interest rates – Is there a sizable difference between your old and new rate?
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Your financial situation – Can you afford closing costs to maximize long-term savings?
Use a refinance calculator to estimate your breakeven point and interest savings. This can give you a better idea of whether paying closing costs upfront is worthwhile or if a no-closing cost option makes more sense.
Bottom Line
While closing costs can range from 2% to 5% of your loan amount, there may be ways to reduce your upfront expenses when refinancing. Carefully weigh the pros and cons of different options to make the best choice for your financial situation. Paying costs upfront often saves more in interest over time – but only if you plan to keep the home long enough to recoup the costs.
When is it worth it to refinance?
Before you apply for a refinance, do some quick math to ensure that it makes sense for your financial situation. To do so, calculate your break-even point to ensure the refinance benefit is worth the costs you’ll pay.
The calculation is easy: Divide your total refinance closing costs by your estimated monthly savings. The result is the number of months you’d need to stay in your home to recoup the costs.
For example, let’s say you can save $200 per month with a refinance that costs you $5,000. When you divide the $5,000 closing costs by the $200 monthly savings, the result is 25. If you stay in your home for at least 25 months — just over two years — the refinance makes sense.
A refinance calculator can estimate your break-even point and how much you can save on your mortgage.
Common fixed mortgage refinance closing costs
Lenders may charge this fee to start the mortgage application process. The actual fee amount will vary by lender, and some banks require you to pay it upfront. Some lenders will waive the fee once the loan process is complete. Most lenders, however, won’t refund the fee if they reject your application.
Many lenders order a home appraisal, whether you’re purchasing or refinancing a home. Banks can’t determine how much you can borrow until they know your home’s true market value. In some cases, however, you may not need an appraisal for your refinance.
It costs money to pull a copy of your credit report and scores, and lenders want to see them before they proceed with your application. Lenders pull several different versions of your credit report, so prices will vary. They often use FICO credit scores.
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Your lender may charge this fee to create and send the documents you sign at closing.
You’ll need a new lender’s title insurance policy when you refinance your mortgage. You can shop for title insurance on a refinance, so make sure you haggle over the title insurance fees to get the best deal available to you.
When you refinance, you may need to pay recording fees to state or local government agencies to document the transaction. These fees vary based on your location.
A reconveyance fee covers the administrative cost of removing a lien from your property title after the loan is paid off. It essentially “clears” your title, confirming the previous lender no longer has a legal claim to your home.
Your lender charges this fee to check whether your property is in a flood zone. If it is, you may need to purchase flood insurance.
How to Pay Closing Costs When Refinancing Your Mortgage
FAQ
Do I have to pay closing costs if I refinance?
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home.
Do you pay down payments when refinancing?
They include closing costs, equity minimums and potentially a lump-sum payment if you opt for a cash-in refinance. A down payment isn’t required to refinance a home, but you’ll typically pay closing costs that add up to 2% to 6% of your remaining mortgage balance.
What’s the downside to refinancing?
Refinancing allows you to lengthen your loan term if you’re having trouble making your payments. You’ll pay more in interest and take longer to pay off your mortgage, which are both bad things.
How much are closing costs for a $400,000 house?
Example: Estimated closing costs on a $400,000 homeTotal adjusted orgination charges$5,100Initial escrow account deposit$708Prepaid interest$750Homeowner’s insurance$1,000Total estimated closing costs$9,158.