Low refinance rates have gotten many homeowners interested in refinancing in recent years, but there is more to deciding whether or not refinancing makes sense than just comparing interest rates. There are a variety of other costs involved in refinancing, and those costs can add up.
How much does it cost to refinance a mortgage? The numbers depend on your circumstances and will vary from one lender to another, but you need to know those numbers before you decide to move ahead with refinancing.
Understanding the Cost to Refinance
Here is a list of the costs that might be involved in refinancing, along with some estimates from the US Federal Reserve on how much those costs usually run:
- Application fee. Lenders may charge between $75 and $300 to process your loan request. You may be on the hook for this fee even if your request is denied, so make sure you understand how your financial condition and credit history stack up to the lender's underwriting standards before you apply.
- Loan origination fee. Some lenders charge as much as 1.5 percent of the loan's principal to cover the cost – and the risk – of initiating a new loan.
- Points. Some loans are structured to involve the payment of points – a certain percentage of loan principal – upfront. Often, lenders will offer a lower interest rate over the life of the loan if you pay points upfront.
- Appraisal fee. This is an objective assessment of your home's current market value, and can cost between $300 and $700.
- Inspection fees. Depending on where your home is located, the lender might require a professional inspection for anything from termites to water quality. These inspections typically cost $175 to $300.
- Attorney's fee. The lender may charge you in the neighborhood of $500 to $1,000 to have their lawyers review the documents, and of course you will probably have to pay your own attorney a similar amount.
- Mortgage insurance fees. Both private lenders and government financing agencies may require you to pay a fee that goes toward insuring against non-payment of your loan. These fees can run anywhere from 0.5 percent to 2.0 percent of the loan's value, and the higher the loan-to-value ratio, the more likely you are to have to pay this type of fee.
- Title search and insurance. This is likely to cost between $700 and $900, and covers a check of the records to make sure you own the home free and clear, as well as insurance against any errors in the title search.
- Survey fee. This checks that the dimensions of the property and the structures on it conform with the official record, and this kind of survey can cost between $150 and $400.
- Pre-payment penalty. The above are all costs associated with initiating a new loan, but when you refinance you might also have to pay your original mortgage lender a pre-payment penalty for paying off your old loan early. The less time you have had your original mortgage, the more likely you are to face a pre-payment penalty.
Coping With Refinance Costs
Here are some options for coping with refinancing costs:
- Paying upfront. The cheapest thing in the long run is often to simply pay refinancing costs in cash upfront, but not everybody has that kind of money readily available.
- Borrowing to cover the costs. If you have sufficient equity in your home, you could simply add the closing costs to the amount you are borrowing, but this will then entail paying interest on those costs until they are repaid.
- "No-cost" refinancing. A variation on adding closing costs to the amount you borrow when refinancing is a practice called "no-cost" refinancing, in which a lender will waive some or all of their fees associated with refinancing. However, this is generally done in exchange for a higher interest rate which might cost you much more than the closing costs over the life of the loan.
- Negotiate. However you decide to pay refinancing costs, remember that those costs are generally not written in stone. Negotiate to have them reduced, and shop around to find out which lenders have the most reasonable costs.
- Factoring costs into refinancing decisions. Refinancing costs can make the decision to refinance something of an apples-and-oranges comparison – you have an existing loan on which you have already paid closing costs, and the possibility of a new loan that will entail a new set of costs. As a result, the decision to refinance involves more than just a comparison of mortgage rates. One way to handle this is to add up the total of all costs – principal, interest, and refinancing costs – over the life of the loan and compare that with the total dollar amount you would pay over the remainder of your current loan. Another method is to use a refinancing calculator that factors closing costs into an annual percentage rate (APR) figure that can be compared with your current loan's APR.
The list of refinancing costs is a long one, but remember that lowering your interest rates can save you money for many years to come. In other words, the long-term savings from refinancing can be enough to overcome the extensive list of refinancing costs you might face, but you can only make an informed decision about that if you pin down what those costs are going to be before you commit.