How Much Does It Cost To Refinance A Mortgage?

Refinancing your mortgage can give you the opportunity to change your loan terms, lower your monthly payments or tap into your home’s equity. But like financing a new home, mortgage refinancing requires homeowners to pay closing costs. Homeowners can expect to pay about 2% – 6% of the loan amount in closing costs.

Assuming a refinance loan size of $100,000, your refinancing closing costs could range from $3,000 to $6,000.

Let’s take a look at how much it costs to refinance, including a breakdown of different fees, as well as some of the benefits of refinancing.

Fees To Refinance Your Home Loan

Your Closing Disclosure is a document that outlines the terms and conditions of your mortgage loan. In the case of refinancing, the Closing Disclosure includes your new loan amount, interest rate and loan term. It also tells you exactly what expenses/closing costs you need to pay at the closing table.

In 2021, average refinance costs were $2,375, which was less than 1% of the average refinance loan amount, according to the latest publicly-available data from CoreLogic.

Here are a few of the refinancing closing costs you might see in your Closing Disclosure:

Keep in mind that when you refinance, the new loan will come with a new interest rate, which will be based on current market rates, your creditworthiness, and other factors.

You also might be able to have lender credits cover your closing costs by accepting a slightly higher rate. This is known as a no-closing-cost refinance. The no-closing-cost refinance option doesn’t require you to pay any closing costs upfront, instead the costs are covered by a small increase in monthly payment from the slightly higher mortgage rate.

Benefits Of Refinancing

Still wondering if you should refinance? There are four major reasons you might want to refinance your home loan. With a refinance, you can lower your interest rate, change your loan terms, consolidate debt or take cash out of your home equity.

Let’s take a look at each of these motives in more detail.

Lower Your Interest Rate

You may be able to save thousands of dollars in interest, particularly if you can refinance to a lower interest rate. This is especially true if you keep the same term on your loan. For example, if you refinance a 15-year mortgage into another 15-year loan, a lower interest rate will automatically decrease your monthly mortgage payment.

Remember to compare annual percentage rates (APRs) when you consider a refinance. Your APR includes both your base interest rate and any additional fees you must pay. The bigger the difference between your base rate and your APR, the more you’ll pay in closing costs when you finalize your refinance.

Just be sure that you’re comparing apples to apples regarding the type of loan you’re considering when looking at APR.

Change Your Loan Terms

You may also want to refinance to change the length of your loan term. For example, a 30-year mortgage term means that you must make monthly payments for 30 years until your loan matures. A refinance can allow you to make your loan’s term longer or shorter, depending on your needs.

Let’s take a closer look at the differences between refinancing to a longer versus a shorter loan term.

Refinance To A Longer Term

You might want to refinance to a longer term if you’re having trouble keeping up with your monthly mortgage payments. Going from a shorter term to a longer term gives you more time to pay back your loan and lowers your monthly payment. A longer term also means you’ll pay more in interest over time.

Refinance To A Shorter Term

You can also refinance to a shorter loan term to pay your mortgage off faster. When you take a shorter term, your monthly payment increases – but you save money on interest by paying off your loan faster. This can be a good option if you earn significantly more money now than you did when you first bought your house and can comfortably afford a higher monthly payment.

Do the math and make sure you’ll be able to make your payments before you opt for a shorter loan term.

Change Your Loan Type

With a mortgage refinance, you also can convert your current loan to a different loan type. This is especially useful if you originally had an adjustable-rate mortgage (ARM) and you’re looking to switch to a fixed-rate loan.

With an ARM, you start off with a low initial rate that eventually adjusts based on the terms of your loan. If your interest rate rises, you’re stuck making higher monthly payments than you were initially. If you’re looking for more stability in terms of your interest rate and monthly mortgage payments, you might consider refinancing to a fixed-rate mortgage.

Consolidate Debt

If you have a significant amount of higher-interest debt that you’re looking to pay off, you could consider a cash-out refinance. A cash-out refinance allows you to take money out of the equity you’ve built in your home. Every time you make a payment on your mortgage loan, or your home’s value rises, you build equity. Equity is the percentage of your home that you own. When you pay off your mortgage, you have 100% equity in your property.

With a cash-out refinance, you take on a loan that’s worth more than what you currently owe. In exchange, your lender gives you cash against the equity you’ve built. Many homeowners who take cash-out refinances use that cash to consolidate existing debts, like credit card and student loan debt.

Cash-Out Refinance Example

Say you have a home worth $150,000 and you’ve paid off $50,000. Your current mortgage balance is $100,000 and you have $50,000 worth of equity in your property. Let’s also say that you have $15,000 worth of credit card debt you need to pay off.

In a cash-out refi, you’d borrow $15,000 from your equity. You would accept a loan worth $115,000 from your lender. In exchange, your lender pays off your existing $100,000 loan and gives you $15,000 in cash. You use that $15,000 to clear your credit card debts and continue making monthly mortgage payments on your new mortgage.

Take Cash Out Against Your Home Equity

You don’t need to use the money from your cash-out refinance to pay off debt. Unlike other types of loans, you can use this money for almost anything. You can boost your savings or cover the cost of a home repair. The tax implications of a cash-out refinance may also allow you to make the interest tax deductible if you use the money for capital home improvements.

Overall, a cash-out refinance can be a great way to access your home equity at a low rate and use the cash for any reason.

How To Lower The Costs Of Refinance

While it costs to refinance, there are ways to reduce the costs and get a better rate and lower monthly payments:

1. Improve Your Credit Score

A higher credit score lowers your perceived risk to lenders. As a result, if you raise your credit score, you can often secure a lower interest rate, which will reduce your overall loan costs.

2. Shop Around For Lenders And Rates

Before accepting the first refinance loan offer you come across, shop around. Gather quotes from various lenders and compare their rates and loan terms to ensure you get the best deal.

3. Negotiate Closing Costs And Fees

Most refinance loan terms are negotiable. To lower your overall loan costs, consider negotiating for lower fees or even discounts and waivers. 

4. Consider No-Closing-Cost Options

To lower your short-term refinancing costs, consider a no-closing cost loan. This lets you refinance with no upfront fee in exchange for a higher loan balance or interest rate. Though you’ll pay more in the long run, this can be a great option if you’re cash-strapped but still want to take advantage of a refinance opportunity.

5. Use Mortgage Points

Mortgage points are a one-time fee you pay to lower the interest rate on your refinance loan. Each point costs 1% of the loan amount and reduces your interest rate by a percentage set by the lender (generally 0.25%).  If you have some extra cash on hand, this can be a great way to “buy down” your mortgage rate and lower your total interest costs.

Mortgage Refinancing Costs: FAQs

Let’s walk through some additional questions about the costs of refinancing a mortgage.

Will my monthly payments decrease when I refinance?

Your monthly payments could go down when you refinance to a longer term depending on current interest rates. A refinance can potentially save you from having trouble making your mortgage payments. Use a refinance calculator to get a better idea of how a refi might change your monthly payment.

Will I save money with a mortgage refinance?

You’ll save money by paying less in interest if interest rates are lower now than when you first got your loan. You may also be able to get a lower interest rate if your credit score is higher now than when you initially took out a mortgage.

If you’re refinancing to a higher interest rate for whatever reason, you might not save as much money in the long run as you would with a lower rate.

Will a mortgage refinance get rid of my PMI?

Private mortgage insurance (PMI) protects the owners of a mortgage against default. Most mortgages require PMI if you make less than a 20% down payment at closing. You may refinance and cancel your PMI if you now own more than 20% equity in your home.

It’s a little different with FHA loans, which are backed by the Federal Housing Administration (FHA). You must pay for mortgage insurance throughout the life of your FHA loan if you made a down payment of less than 10%. Many people who refinance from an FHA loan to a conventional loan, for example, can remove the mortgage insurance requirement after they reach 20% equity in their home.

Why are closing costs so high on a refinance?

High refinance closing costs are the result of the many fees required to close a loan, including application, appraisal, origination, and other fees. However, you can often lower your closing costs by shopping around, negotiating, or exploring no closing-cost loan options.

Is a mortgage refinance worth it?

Whether a mortgage refinance is worth it in the long run can be determined by your “break-even point.” The refinance break-even point is the point where it makes sense financially to convert to a new loan with different loan terms and conditions.

To calculate your break-even point, you’ll divide your total closing costs for refinancing by the amount of money you save every month. The result of this calculation is the number of months it would take you to break even on refinance.

The Bottom Line: It Costs To Refinance But Can Save You Money

A refinance means that you pay off your original mortgage and take on a new loan. You can refinance to change your interest rate or mortgage term, consolidate debt or take cash out of your equity.

You pay closing costs and fees when you close on a refinance – just like when you signed on your original loan. You might see appraisal fees, attorney fees and title insurance fees all rolled up into closing costs. Generally, you’ll pay about 2% – 6% of your refinance loan’s value in closing costs.

After reviewing the costs of refinancing, are you ready to begin the process? Submit your application online with Rocket Mortgage® today.