What You’ll Learn
Which costs to expect when refinancing your mortgage
What factors determine your refinance closing costs
How to lower the upfront cost of refinancing and maximize your long-term savings
Refinancing your mortgage can be an effective way to significantly reduce the cost of your loan or access cash through your home equity. If you’re thinking about refinancing for either of those reasons, keep in mind that there are costs to consider as well.
Just like when you originally bought your home, you'll need to pay certain fees to close on a refinance. The exact amount is typically around 2–5% of your loan amount. However, you don’t necessarily 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; you can also 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, review the costs of a refinance and ways to reduce those costs so you can maximize your long-term savings.
Common refinance costs explained
Each refinance situation is unique, but there are a few fees that apply across the board. Here's an overview of the most common loan expenses:
No matter which lender you work with, there will be certain third-party fees baked into your refinance. Many of these costs cover services provided by independent contractors and can’t be avoided. Some common third-party fees you may encounter include:
- Credit report fees: Before approving you for a refinance, your lender will need to check your current credit score and ensure you’re eligible for a new loan. Credit report fees can cost up to $100.
- Home appraisal fees: An appraisal confirms 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 appraisals can cost anywhere from $400 to $900.
- Title search and insurance fees: Before issuing 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 ensures 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 can cost between $700 and $900.
- Recording fees: Recording fees: 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 can vary based on your location.
Some lenders charge fees for their services. These costs can rack up quickly and rarely add value to your refinance, so shop around and compare prices before choosing a lender. If you’re working with Better Mortgage, you can skip this section altogether—we don’t believe in passing on costs to our customers and we don’t charge lender fees for any of our home loan products.
Some common lender fees you may encounter include:
- 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.
- Loan origination fees: Other lenders charge origination fees to cover the costs of creating the home loan—these fees typically cost between 0.5%—2% of the loan amount.
- Underwriting fees: Underwriters do the laborious work of checking all your financial documents, verifying income, and examining risk. For their services, many lenders charge a fee. At Better Mortgage, our team has developed tech that automates much of the underwriting process so there’s no need to charge another fee.
- Loan officer commission fees: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 Home Advisors to help 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|
|Title search & insurance||$700–$900|
|Recording fee||$125, varies by location|
|Loan origination fee*||0.5%–2% of loan amount|
|Loan officer commission*||1% of loan amount|
*Fees you’ll never see from Better Mortgage
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. Here are a few things that can determine your closing costs:
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, allow borrowers to 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: Certain loans may have additional fees, like VA loans which include a funding fee. While they shouldn't stop you from qualifying for the refinance, you should be aware of this fee so you're not surprised by it at closing.
Points and credits: You may remember points and credits from your original mortgage, but in case you need 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 can help reduce or even eliminate your closing costs altogether. Just keep in mind that you’ll have higher monthly payments.
The longer-term costs of refinancing
To calculate the benefits of refinancing your mortgage, you’ll need to take more than just upfront closing costs into consideration. You’ll also need to understand the ongoing expense of your new mortgage terms and make sure you have enough time in your loan to recoup the initial cost with the money you save over time.
This is known as “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 upfront 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 qualifying for a better rate. Improving your credit score can help you get pre-approved for a lower rate, saving you thousands of dollars 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 you could get 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.
Keep in mind that shopping for mortgages can subject you to hard credit inquiries aka the type of inquiries that impact your credit score. The good news is that if you’re shopping for a mortgage refinance, 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 like Better Mortgage that doesn’t charge any unnecessary lender fees.
Buy down your mortgage: If you’re doing a rate-and-term refinance and find yourself with some extra cash on hand, you could choose to lower your long-term costs by buying down your principal amount at closing. By reducing your principal amount at the outset of your new loan, 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 standardized 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 plan to pay in the mortgage process.
Let us help lower your refinance costs
Do you have to pay closing costs when you refinance? Yes, some. But at Better Mortgage, we’re dedicated to making sure you never pay any unnecessary closing costs or fees. That’s why we don’t charge application fees, origination fees, or underwriting fees, and our loan officers never get paid commission. We’ll show you exactly what you’re paying for, why, and back up our digital experience with expert human support. If you’re interested in refi, we’re here to make it a simple, seamless experience.
Ready to see how much you can save by refinancing with Better Mortgage? See your rates.
Disclaimer: This blog post is for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal or accounting advice.