People usually refinance a mortgage to save money. But refinancing itself can be expensive. Here’s what it costs — and the factors that can impact that price tag.
cnythzl/Getty Images/iStockphotoRefinancing your mortgage is often a smart strategy for homeowners. It might get you a lower interest rate or monthly payment, or it could help you pay off your loan faster and with fewer interest costs. In some cases, you can even use a refinance to take cash out of your home and pay off debts, bills, or other expenses.
Just like your original mortgage, refinancing comes with closing costs — a range of fees that compensate your lender, appraiser, title company, and more — and these can amount to a pretty penny if you’re not careful.
Are you considering refinancing your mortgage loan? If so, these are the costs you should be prepared for.
How much does it cost to refinance a mortgage?
Refinancing costs vary widely depending on your lender, location, loan amount, loan type, and other factors. Generally speaking, though, you can expect to pay somewhere between 2% and 5% of the total loan amount on closing costs. On a $350,000 loan, that would put your closing costs between $7,000 and $17,500.
That’s just a general range, though. In some states, you’ll pay much more. In others, you’ll pay less. As Darren Tooley, senior loan officer at Cornerstone Financial Services, explains, “Some states have certain costs that others don’t, which can sometimes be thousands of dollars.”
According to the 2021 Refinance Closing Cost Report from CoreLogic and ClosingCorp, closing costs (including taxes) are highest in New York, Pennsylvania, Delaware, Florida, and California. They’re lowest in Missouri, Indiana, Arizona, Mississippi, and Kentucky.
What goes into closing costs
Closing costs encompass dozens of different fees, charges, and taxes, all of which can vary quite a bit based on lender and location.
Typically, though, you can expect your closing costs to include the following:
- Origination, underwriting, and application fees
- Appraisal and attorney fees
- Credit check fee
- Fees for title services and insurance
- Survey and flood determination fees
- Recording fees
- Prepaid interest, taxes, and mortgage insurance
- Escrow funds
If you buy discount points — which allow you to pay an upfront fee to lower your loan’s interest rate — these would also be paid as part of your closing costs. Either way, though, you’ll know the total costs well before closing on your loan.
“Your mortgage lender will give you a loan estimate that includes a list of closing costs and loan details — including the interest rate and monthly payment,” says Matt Vernon, head of consumer lending at Bank of America.
When is refinancing a mortgage worth it?
Since refinancing comes at a price — sometimes a five-figure one — it’s important to be sure those costs are worth it before diving in. One way to do this is to calculate your break-even point — or the month in which you’ll recoup your closing costs.
To do this, you’ll take your total closing costs and divide them by the amount of money your refinance will save you on your monthly payment. That will give you the number of months it will take for the refinance to save you more than it cost. You should also factor in the interest rate of your new mortgage. In most cases, it only makes sense to refinance if interest rates drop 0.75 percentage points or more from your rate.
So, for example, if your refinance costs $5,000 and shaves $100 off your monthly payment, it will take you 50 months — or a little over four years — to recoup those closing costs. In short, if you plan to stay in the home that long, refinancing may be worth it. (If you’re unsure, though, you may want to reconsider).
The potential savings aren’t the only thing to think about when considering the worth of a refinance — it all depends on your goal. As Tooley puts it, “In order to determine whether it’s worth it, the first thing to consider is what the goal of the refinance is. If the goal is to finance home improvements or pay off other higher interest debt with a cash-out refinance, then the costs are less important because you have a specific need.”
How to reduce your refinancing costs
There are many ways to reduce your refinancing costs. For one, you can shop around for your lender. Interest rates, fees, and other costs vary widely between companies, so comparing offers is key if you want to find the lowest-cost option.
You can also shop around for your title company, land surveyor, and other third-party service providers. Just look at the “Services You Can Shop For” section of your loan estimate. You can pick and choose these providers as you see fit.
Finally, you may be able to roll your closing costs into your loan amount, depending on your lender. Just be careful with this strategy, as it adds to your loan balance, increasing your monthly payment and long-term interest costs, too.
Should I refinance my mortgage?
There’s no hard and fast answer when it comes to refinancing. For some homeowners, it can be a smart way to fund home repairs or save money on interest. For others, the move might actually cost more in the long run.
If you’re not sure a mortgage refinance is the right choice for your finances, talk to a loan officer or financial advisor. They can help you make the best decision for your goals and budget.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].