What Does It Cost to Refinance a Mortgage?

Every homeowner’s situation is unique and as your circumstances change, it is beneficial to know that refinancing gives you options. Whether you want to reduce your monthly mortgage payments, pay off your loan sooner, or access your home’s equity, refinancing is commonly used by homeowners who want to save more money over time.

However, even the simplest refinance will come with up-front costs that you should be aware of. From prepaid items to closing costs and lender fees, these expenses are a part of the loan process, similar to when you took out your first home loan.

It is important to understand what it costs to refinance a mortgage before you decide it is the right option for you.

How much does it cost to refinance a mortgage?

On average, you can expect the closing costs and fees to refinance will be between 2%-5% of your new loan’s balance. While the exact amount of each fee may vary from person to person and from lender to lender, we can calculate using a quick example.

Let us pretend you are interested in refinancing a $175,000 mortgage with the goal of paying off the loan sooner. You decide to opt for a fixed rate for 15 years. In this scenario, your total closing costs may be between $3,500 to $8,750.

It is important to note that the closing costs for a refinance will vary depending on a number of factors, including the size of the new loan and location of your current home. Here is a breakdown of the most common costs and fees associated with refinancing a mortgage:

• Origination and underwriting fees

• Title fees

• Prepaid home costs

• Mortgage insurance 

• Appraisal costs

Do you need a down payment to refinance?

Fortunately, you may be able to cross a down payment off of your list of refinance costs. Mortgage refinances typically do not require a down payment as long as you meet the minimum equity requirements established by your lender. However, this may not be the case if you have not lived in the home long enough to build up equity. The minimum equity requirement you need to meet will vary depending on the lender, so be sure to reach out to yours to discuss their internal standards.

Does refinancing affect your credit score?

Refinancing your mortgage will affect your credit score. You can expect a temporary drop in your score, but it should recover within a few months as long as you maintain good habits and timely payments.

In reverse, your credit score will also have an effect on your refinance rate. Most lenders will require that you have a minimum credit score of 620 to qualify for a refinance. Taking the time to improve your score before applying can help you obtain a lower interest rate and save you more money over the life of your new loan.

Who pays for refinancing closing costs?

As the borrower, it will be your responsibility to cover the closing costs on your refinance.

It is likely that you will come across lenders who offer no-cost refinance options, and they may save you money on up-front expenses. However, contrary to what the name implies, your closing costs will not be entirely eliminated. Instead, a no-cost refinance simply rolls those fees into the loan resulting in a higher loan balance or interest rate.

What are the benefits of refinancing?

The exact benefits of refinancing your mortgage will vary depending on the type of refinance you decide is best suited for your needs and financial goals. Some of the most common advantages a refinance can offer homeowners include:

• Decreasing your monthly payments

• Lowering your interest rate

• Accessing home equity to use as funds for whatever you need

• Paying off your mortgage faster

Before you start applying for a refinance, be sure to take some time to evaluate why you want to refinance.

When is it the right time to refinance your mortgage?

It is worth highlighting that there is no one right time to refinance. Your current mortgage type, financial goals, and market interest rates are important factors to consider before deciding if the benefits of a refinance will outweigh the short-term costs.

That being said, there are a few ways you can determine when it is the right time to update your current mortgage.

Keep an eye on rates

As the economy and housing market temperature changes, interest rates fluctuate. Since most homeowners do not go into a refinance wanting a higher rate than their current one, you will want to be aware of current rate trends before diving into the process.

If interest rates are currently higher than they were when you got your first mortgage, it may be better to hold off on refinancing until they drop again.  

Know your options

You will also want to understand all of your refinance options before picking one. While some mortgages allow you to refinance almost immediately, other home loans may require you to wait a predetermined amount of time before you are eligible. Consider reaching out to your lender for a breakdown of the types of mortgage refinances they offer, what is available to you, and an estimate of the potential up-front costs.