How much does it cost to refinance?

Published November 9, 2020
by Better

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What You’ll Learn

What costs to expect when refinancing your mortgage

What factors play a role in refinance closing costs

How to lower the upfront cost of refinancing and maximize your long-term savings

If you've been thinking about refinancing your mortgage, you're not alone. Right now, homeowners across the country are taking advantage of historically low interest rates and rising home values. You may find that a refinance will save you money on your monthly mortgage payments or even let you tap into your home equity for cash at a low rate. But there are costs to consider. Just like when you originally bought your home, you'll need to pay certain fees to close on a refinance.

So, how much does it cost to refinance? The exact amount is typically around 2–5% of your loan amount. However, you don’t always have to pay that much out of pocket at closing. There are “no-cost” refinance options that allow you to roll your closing costs into your loan, or you can take lender credits to reduce or eliminate your upfront closing costs in exchange for a higher interest rate on your loan.

Before you get started, let’s take a look at the costs and ways to save on your mortgage refinance so you can maximize your long-term savings.

Common refinance costs explained

Each refinance situation is different, but there are a few fees that come up often. Here's an overview of the most common loan expenses:

Third-party fees

No matter which lender handles your refinance, there will always be some unavoidable costs baked into the process. Many of these are third-party fees for services provided by independent contractors, such as:

  • A credit report fee: Lenders check your current credit score to ensure you’re eligible for a new loan. The fee for this service is usually passed onto you and can cost up to $100.
  • A home appraisal fee: An appraisal tells the lender how much your home is worth in the current market. Lenders usually require an appraisal when your loan is refinanced to ensure that the property meets loan-to-value requirements, and costs anywhere from $300 to $550.
  • Title search and insurance: To issue a new loan, lenders need to know that no one else has a financial claim on your home. A title search and title insurance policy help them ensure there are no other owners, mortgages, mechanic’s liens (claims for unpaid work from contractors who have worked on the property), or tax liens. The fee for title search and insurance will cost between $700 and $900.
  • A recording fee: Once your new loan is closed, it must be registered with the county clerk. The county charges around $125 for this service, but the price varies from county to county.

Lender fees:

If you’re refinancing with Better Mortgage, you can gloss over the following section, as we don’t charge lender fees for any of our home loan products. That said, some lenders charge fees for their services. These costs can add up quickly, and rarely add value to your refinance, so we recommend doing your due diligence.

Some common lender fees you may encounter include:

  • An application fee: Some lenders charge for processing your initial loan application. What’s worse: they usually make you pay for it whether you're approved for a loan or not. With Better Mortgage there are no application fees, but other lenders charge up to $500 just to apply.
  • A loan origination fee: We never charge origination fees, but other lenders charge 0.5-2% of the loan amount to cover the costs of creating the home loan.
  • An underwriting fee: Underwriters do the laborious work of checking all your financial documents, verifying income, and examining risk. For their services, many lenders charge a fee. We, on the other hand, developed tech that automates much of the underwriting process so there’s no need to charge another fee.
  • Loan officer commission: In our opinion, these fees are complete BS. Not only do loan officer commission fees make your home loan needlessly pricey, but they cause loan officers to push loan products that you don’t need so they can pocket a bigger commission. We incentivise our Loan Consultants to satisfy customers instead of selling more expensive products.

Remember: Lender fees are not standard and not all mortgage providers charge them. Make sure you’re well versed on which fees you should and shouldn’t pay.

Average costs of refinance fees

Closing costs Average fees
Credit report fee Up to $100
Appraisal fee $300–$550
Title search & insurance $700–$900
Recording fee $125, varies by location
Application fee* $0–$500
Loan origination fee* 0.5%–2% of loan amount
Loan officer commission* 1% of loan amount

Keep in mind, these are only estimates. The actual costs will depend on your loan type, lender, location, and other circumstances.

What factors determine your closing costs

While some closing costs are fairly standard from lender to lender, others will change based on your home, your loan, and your personal preferences, including:

Private mortgage insurance: If the loan-to-value ratio of your refinance is more than 80% (or if you’ve built less than 20% equity in your home), then your lender will require you to take out private mortgage insurance (PMI). Most lenders, like Better Mortgage, have clients make monthly PMI payments, but some lenders allow you to pay it all up front. If you do pay up front, you’ll have to factor that into your closing costs.

The type of loan you use to refinance: There are some small fees associated with VA loans. The fees shouldn’t stop you from getting a VA loan if you qualify, but you should be aware of these fees so you won’t be surprised at closing.

Points and credits: Remember points and credits from your first mortgage? As a quick refresher, points are fees you can pay to lower your interest rate. 1 point usually costs 1% of the total loan amount and is worth a 0.25% discount on your interest rate. So, if you’re borrowing $100,000 at 3.75% interest, you could buy 1 point for $1,000 at closing to lower your interest rate to 3.5%, or 2 points for $2,000 to lower it to 3.25%, and so on. If you’re in the market for a rate-and-term refinance, this might make sense for you.

Credits are the inverse of points. They allow you to lower your closing costs by agreeing to a higher interest rate. You might not want to take credits if you’re looking for a rate-and-term refinance, but if you’re in the market for a cash-out refinance and don’t have a ton of cash on hand, credits may lower or even eliminate your closing costs. Just keep in mind that you’ll have higher monthly payments.

The longer-term costs of refinancing

Closing costs are just part of “the cost of refinancing.” There are long-term implications of a brand new mortgage. With a rate-and-term refinance, you’ll want to make sure that the money you spend refinancing will be paid off by the money you save down the line and how long that will take.

There’s a simple equation to help you find out. We call it “finding your break even point” All you need to do is divide the closing costs by your monthly savings to find out how long it will take to break even.

So, let’s say the total cost for your new loan is $4,000 and you stand to save $100 each month in mortgage payments. In this scenario, it would take you a little more than 3 years to break even.

$4,000 (cost of refinancing)
/ $100 (monthly payment savings)
= 40 months

If you’re not a math person, we’ve created an easy to use refinance calculator to help you find your break-even point. This tool will show you when you’ll recoup your closing costs in savings and how much you’ll save over the life of your new rate-and-term refinance. If you’re interested in a cash-out refinance to pay off credit card or student loan debt, you’ll need to add those monthly savings to your own personal calculations.

How to lower the short- and long-term costs of refinancing

Now that you know the basics, let’s get a little more advanced. Here are some tips that can help you maximize your savings by lowering the cost of your refinance:

Improve your credit score: Just like your initial mortgage, your credit score is the key to a better rate. Improving your credit score can help you get pre-approved for a lower rate, saving you thousands over the life of your loan.

Shop around: As we’ve discussed, there are a lot of lenders out there charging an arm and a leg for services lenders like Better Mortgage provide for free. Take a look around, and price out different refinances before you commit. When your goal is to save money, doing a little research now can pay off later.

Just keep in mind that shopping for mortgages will often require that you’re subjected to hard credit inquiries; the type of inquiries that impact your credit score. The good news is that if you’re shopping for a mortgage you have a 45 day window in which only one hard credit inquiry will impact your score.

Choose a no-closing-cost refi: A no-cost refinance does not “free refinance.” But it does mean that your closing costs are either rolled into your loan or covered by the lender through lender credits (which you obtain by accepting a higher interest rate). But keep in mind, both of these options will affect the amount you spend in interest over time.

Negotiate your closing costs: Although most third-party fees are likely set in stone, those who charge lender fees may be willing to negotiate. It never hurts to ask if there’s any wiggle room.

Choose a lender with fewer fees: If haggling isn’t your style, you could simply choose a lender that doesn’t charge any unnecessary lender fees (like Better Mortgage).

Buy down your mortgage: Rate-and-term refinancers with extra cash on hand, may want to lower their long term costs by buying down their mortgage at closing. By putting down more towards your principal at closing, you’ll pay less interest in the long run.

How to compare lender refinance costs

Whenever you submit a mortgage application, your lender is required by law to provide you with a Loan Estimate within 3 business days. This 3-page document provides important information, including your estimated interest rate, monthly payment, and closing costs of your loan.

A Loan Estimate will help you compare costs across lenders and ensure there are no surprises. Again, we can show you which fees you should and shouldn’t pay in the mortgage process.

Let us help lower your refinance costs

We’re dedicated to making sure you never pay any unnecessary closing costs or fees. We’ve said it before, but we don’t charge application fees, origination fees, or underwriting fees, and our loan officers never get paid commission. That means more bang for your buck on your refinance.

You also get a completely transparent process. We’ll show you exactly what you’re paying for, why, and back up our powerful digital tools with expert human support. If you’re ready to refi, we’re ready to make it a simple, seamless experience.

Ready to see how much you can save by refinancing with Better Mortgage? See your rates.

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