How Much Does It Cost To Refinance A Mortgage?

If you’re looking for an opportunity to change your loan terms, lower your monthly mortgage payments or tap into your home equity, you might benefit from a mortgage refinance.

But, like financing a new home purchase, one of the requirements for refinancing is that homeowners pay closing costs on the new loan. In the case of a refinance (or “refi”), you can expect to pay about 3% – 6% of the loan amount in closing costs.

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.

How Much Does It Cost To Refinance Your Mortgage?

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.

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

• Application fee: Some lenders charge an application fee when you apply for a You’ll sometimes have to pay the application fee even if the lender rejects your refinance request.
  
  
• Appraisal fee: Most mortgages require a home appraisal before refinancing, which helps determine how much your house is worth and how much the new loan amount should be. Most appraisers charge $600 – $2,000 for their services.
  
  
• Attorney fees: In some states, an attorney must review and file paperwork for your loan. Attorney fees can vary widely by state.
  
  
• Title search and insurance: Your lender may require another title search and title insurance when you refinance your loan. Title insurance averages 0.5% – 1% of the property’s purchase price.
  
  
• Origination fees: A loan origination fee is the amount it costs your lender to process the loan application. Origination fees also typically cost around 0.5% – 1% of the total loan amount.

Other expenses that might be included in your refinance closing costs include a recording fee (if you’re updating ownership of the property), a credit report fee and an underwriting fee. You can expect to pay around 3% – 6% of your loan balance in closing costs. You may be able to roll your closing costs into your loan balance, depending on your lender’s requirements.

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.

Why Do Homeowners Refinance?

Still wondering if you should refinance? There are four major reasons why 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 Refinance A Mortgage: Step By Step

Now that you understand some of the reasons to refinance, let’s go over the step-by-step process for taking out the new loan.

1. Determine Whether You Qualify

The first step is to see if you qualify for a refinance. If you’re considering a cash-out refinance, you must already have a significant amount of equity in your home. If you’re not sure whether you meet certain mortgage refinance requirements, your lender will help you figure this out.

You also need to consider how much you’ll pay in refinance closing costs. Just like when you bought your home, you pay closing costs to your lender when you sign on your new mortgage. As a reminder, you can expect your closing costs to equal about 3% – 6% of the total value of your loan.

2. Choose A Mortgage Lender

Next, find a lender. You don’t need to refinance with the same company that services your existing mortgage. Compare mortgage refinance rates and fees and ask the lenders questions, like what their availability looks like and how long the refinance process usually takes.

3. Fill Out An Application To Refinance

Once you choose a lender, you’ll submit a refinance application. Applying for a mortgage refinance is to the same as applying for your first mortgage (expect there is no purchase agreement). Your loan officer will ask you for a few documents, including your most recent pay stubs, W-2s and bank statements. You may need to provide additional documentation if you’re self-employed.

You may have the option to lock in your interest rate once you’ve completed your application. Locking your interest rate protects you against rising rates while you finish closing on your loan.

4. Go Through Underwriting

Your lender will schedule underwriting and an appraisal after you submit your documents. During underwriting, your lender looks at the information you submitted and makes sure you meet minimum loan standards.

5. Get A New Home Appraisal

A home appraiser will visit your property and give you a professional opinion of how much it’s worth. Lenders require appraisals because they need to know that the house is worth the money it’s being mortgaged for. You may need to adjust the terms of your refinance if your appraisal comes back low.

6. Review Your Closing Disclosure

Your lender will give you a Closing Disclosure once you’re done with underwriting and appraisals. The Closing Disclosure tells you the final terms and conditions of your loan and what you must pay in closing costs. You’ll need to acknowledge that you’ve read the disclosure, and your lender will schedule your closing date.

7. Close On Your New Loan

At closing, you’ll sign off on your new loan. Bring a valid form of photo identification, a cashier’s check for your closing costs (if you’re not rolling them into your loan) and your Closing Disclosure. Sign off on your new loan and begin making payments toward your new mortgage.

Keep in mind that if you get a cash-out refinance, you won’t receive funds at closing. Your lender must give you 3 business days after closing to cancel your transaction. Your loan isn’t technically closed until this window passes. Most borrowers receive their funds within 3 – 5 days after closing.

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.

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

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 3% – 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.