Understanding Mortgage Refinance Closing Costs
If you’re ready to replace your existing mortgage with a better one, be sure you pay attention to your estimated refinance closing costs. Understanding the total cost to refinance your mortgage will help you decide if you’re really getting your best deal.
What are mortgage refinance closing costs?
Refinance closing costs are fees and expenses related to replacing your existing mortgage balance with a new one. They typically include many of the same fees you paid when you first closed on your home loan.
There’s no set formula or method for calculating refinance fees: Some of these fees are flat fees that vary from lender to lender, while others are based on a percentage of your loan amount. There are also “recurring” closing costs that relate to normal homeownership expenses, such as homeowners insurance and property taxes.
How much are refinance closing costs?
You’ll typically pay mortgage refinance closing costs ranging from 2% to 6% of your loan amount, depending on the loan size. National average closing costs for a single-family home refinance were $2,375 without taxes or recording fees, according to 2021 data from ClosingCorp, a real estate data and technology provider. That’s an increase of $88 from the 2020 closing cost figures.
As mentioned above, some closing costs are considered fixed or “flat” fees, which means they’re the same regardless of your loan amount. Others are percentage-based, meaning they’ll vary based on your loan amount.
Common fixed mortgage refinance closing costs
| Refinance cost | How much? |
|---|---|
| Loan application fee | $75 to $500 |
| Home appraisal | $225 to $700 |
| Credit report fee | $10 to $100 per person |
| Document preparation fee | $50 to $600 |
| Title search/insurance fee | $400 to $900 |
Loan application fee. Lenders may charge this fee to start the mortgage application process. The actual fee amount varies by lender, and some banks require you to pay it up front. 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.
Home appraisal. 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.
Credit report fee. 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.
Document preparation fee. Your lender may charge this fee to create and send the documents you sign at closing.
Title search/insurance fee. 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.
Common percentage-based mortgage refinance closing costs
| Refinance cost | How much? |
|---|---|
| Loan origination/underwriting fee | 0% to 1.5% of loan amount |
| Mortgage points | 1% of the loan amount per point |
| Mortgage insurance |
|
Loan origination/underwriting fee. The loan origination process costs lenders money, so think of the fee as your way of telling the bank you intend to proceed with the process. This fee often includes the lender’s cost of paying a loan officer to help originate the loan and compensating the underwriter for assessing your ability to repay it.
Mortgage points. Also known as discount points, you can pay mortgage points to your lender at closing for a reduced mortgage interest rate. Each point equals 1% of the loan amount and can lower your interest rate by as much as 0.25%. For example, if you buy one point on a $100,000 mortgage, it will cost you an additional $1,000 to get a lower interest rate. If you were originally quoted a 6.75% rate on that loan and bought a point to get your rate down to 6.5%, you could save nearly $6,000 in interest over the life of a 30-year loan term.
Mortgage insurance. If you have 20% equity in your home, you won’t pay any private mortgage insurance (PMI) to cover the risk you might default on a conventional mortgage. However, loans backed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) require mortgage insurance, or some type of guarantee fee, regardless of how much equity you have.
THINGS YOU SHOULD KNOW
If you currently have an escrow account for the payment of your property taxes and homeowners insurance, you may want to keep that feature with your new refinance. If that’s the case, the lender will need to set up a new escrow account and collect enough property taxes and insurance to cover those bills when they come due each year.
However, federal law requires your current lender to refund any escrow balance to you within 20 days of paying off your original loan balance, so you may end up getting back the bulk of what you spend for a refinance escrow account.
How much should you pay for refinance closing costs?
A great way to get an idea of the cost to refinance a mortgage is to use a reliable refinance calculator. Besides getting a rough estimate of your closing costs, you can also calculate your break-even point — the amount of time it takes you to recoup those costs.
It makes sense to pay higher closing costs, or even discount points, if you plan to stay in your home for a long time. However, you should minimize your costs and take a slightly higher rate if you plan to sell your home before you would recoup your costs.
Here’s an example, assuming you spend $6,000 to save $150 per month:
To calculate the break-even point you’ll simply divide $6,000 by $150, which equals 40. So in this case, as long as you stay in your home for 40 months, the refinance makes sense.
Now let’s assume you only plan to be in your home two more years, and the lender offers you a rate that only saves you $100 per month with $1,000 in closing costs. You’d divide $1,000 by $100 to come up with a 10-month break-even point. Even though you’re only saving $100 per month, the 10-month break even still saves you money before you sell the home.
Factors that could impact conventional refinance closing costs in 2023
Fannie Mae and Freddie Mac, two government-sponsored enterprises that make the rules mortgage lenders follow to set interest rates for conventional loans, announced major changes that may affect your closing costs and interest rate for refinance mortgages made after May 1, 2023. Although lenders typically pass these charges onto consumers in the form of higher interest rates, they may also be charged as discount points, which would add to your total closing cost bill.
Changes shaded in red below mean you’re likely to pay a higher rate or more in closing costs, while green shading means you could save some money.
Credit score
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780 is the new benchmark credit score needed to get the best interest rates — this is an increase of 40 points from the previous standard of 740
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721 to 779 credit score fees will be higher, with higher rates and costs possible
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620 to 720 credit score fees are dropping, with lower rates and costs possible
Down payment
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Fees will increase for down payments between 5% and 20% and credit scores between 680 and 779, with higher rates and costs possible
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Fees will decrease for down payments between 3% and 25% for credit scores between 620 and 679, leading to potentially lower cost and rates
Debt-to-income (DTI) ratio
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Fees will increase for DTI ratios above 40%, leading to potentially higher rates and costs*
*This change doesn’t take effect until Aug. 1, 2023
Property type
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Fees for two- to four-unit (multifamily) homes are being reduced, which could lead to lower refinance rates and costs
Occupancy
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Fees for investment properties are being reduced, which could reduce your closing costs and interest rate, and improve cash flow on your rental homes
Cash-out refinancing
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Fees will increase for homeowners borrowing 30% to 80% of their home’s value with a cash-out refinance, leading to potentially higher rates or closing costs
10 ways to reduce your refinance closing costs
There are a number of factors that affect the costs a lender charges for the refinance rate they offer, and knowing how they impact your refinance expenses can help you reduce your refinance closing costs.
Here are 10 refinance cost-cutting tips:
- Get your credit in the best possible shape. Aim for a credit score of 780 or higher to get your best refinance rate. Pay your bills on time and avoid applying for new credit or maxing out credit card balances. A low credit score could result in an extra fee to cover the added chance you might default.
- Reduce your debt before you refinance. You still have some time (until Aug. 1, 2023) before the DTI ratio fees are effective, so pay off credit card debt and refinance that auto or student loan before refinancing to avoid paying a higher rate or bringing extra dollars to the closing table.
- Borrow less of your home’s value. Lenders look at your loan-to-value (LTV) ratio when determining your interest rate, and the more you borrow, the riskier they consider the loan. You’ll also avoid mortgage insurance costs if you borrow 80% or less of your home’s value with a conventional loan.
- Avoid cash-out refinances if you can. Converting home equity to cash with a cash-out refinance is a great way to clear out credit card balances or make home improvements. However, the cost of that cash could range between 0.375% to 5.125% of your loan amount on a conventional loan, depending on your credit score and LTV ratio, so make sure the benefit of the extra funds outweighs the cost.
- See if you’re eligible for a streamline refinance program. If you currently have an FHA, VA or USDA loan, see if you’re eligible for an FHA streamline, VA interest rate reduction refinance loan (VA IRRRL) or a USDA streamline assist refinance. These programs don’t require an appraisal and charge a lower mortgage insurance fee than regular government-refinance programs. An added bonus: You won’t need to verify your income.
- Work with the same title insurance company. You can save money on the lender’s title insurance policy by asking for a reissue rate, a discounted policy amount you can get for working with the same title insurance company used for the original loan.
- Shop around with multiple lenders. Before you decide to just refinance with your current lender, take a look at the competition and get two to three additional refinance quotes.
- Negotiate lender fees. Request that certain fees be reduced or waived, especially if you have a strong credit profile and substantial equity in your home. Ask your loan officer about lender credits for any costs you think are out of line.
- Review your loan estimate. Go over your loan estimate with a fine-tooth comb and ask for clarification about any costs you’re not clear on. You should also take advantage of comparison-shopping for the services you’re allowed to shop for, which can be found on Page 2 of the loan estimate.
- Try for an appraisal waiver. Ask your lender if you qualify for an appraisal waiver — if so, you could save a couple of hundred dollars on your refi.
What about no-closing-cost refinances?
Lenders may offer you a new loan with no refinance closing costs. While a no-closing-cost refinance may keep you from spending a chunk of money out of your pocket at closing, you actually pay for it over the life of your loan.
It’s not free money; a no-closing-cost refi simply means your lender hikes your interest rate or adds the closing costs to your new loan amount. If you’re refinancing to lower your monthly payments and reduce your interest expense, a no-closing-cost loan might not be worth it, unless you’re planning to sell your home in the near future and need a short break-even point.