When you refinance your home, you replace your existing mortgage with a new one. Your existing mortgage is paid off and your new mortgage can be with either the same lender or a different one.
Thanks to the current low rate mortgage environment, refinancing has the potential to lower your mortgage payments significantly. Seeking out the best refinance mortgage companies will help you to find the most appropriate refinance deal for your circumstances.
However, while refinancing can be a sensible way to reduce your outgoings, it will also come at a price. It is therefore prudent to get the full picture on how much closing costs will set you back.
What are refinance closing costs?
On a national level, average closing costs on a refinance are around $5,000, according to data from Freddie Mac. In general you can expect to pay 2% to 5% of the total loan amount. So, if you were refinancing a $175,000 mortgage loan, for example, you could pay between $3,500 and $8,750.
Costs will be dependent on factors such as:
- Your loan size
- Your mortgage term
- Your mortgage lender
- Your location
- Your credit score.
Common mortgage refinance fees
If you’re thinking about refinancing your mortgage, some of the most common closing costs fees are outlined below:
- Loan application fee: Some lenders will charge an application fee when you apply to refinance. Often this must be paid even if your application is rejected, and it can vary between $75 and $500.
- Origination fee: This is the fee to process, underwrite and close the loan for you. It can be between 0.5% and 1.5% of the loan amount.
- Appraisal fee: A property appraiser will need to evaluate your home and assess its value. Expect to pay between $300 to $400.
- Credit check fee: Lenders will need to check your credit report before your application can be accepted. The fee charged for this usually sits between $30 and $50.
- Title search and insurance fee: Your lender will typically require a title search before your refinance can be approved. This can cost around $400. Additionally, you’ll need to purchase a new title insurance policy to guard against any problems with the title transfer. Costs are around $800.
- Recording fee: Depending on the area you live in, you may be charged a recording fee for handling the paperwork. Costs vary depending on location but are usually between $25 and $250.
- Flood certification: Some areas require you to pay for flood certification. This typically costs $50 to $150.
- Attorney fee: Certain states require an attorney to review and file paperwork for your refinance. Fees can range from $500 to $1,000.
How to lower the cost of refinancing
If you’re concerned about how much refinancing will set you back, there are several steps you can take to reduce these costs:
Improve your credit score
A good credit score can increase your chances of being offered the best refinance deals. So, before applying to refinance, be sure to check your credit score and work on improving it if necessary. This is something the best credit repair services can help with, but measures include correcting any errors on your credit report, paying bills on time and reducing your outstanding debt.
Keep in mind that refinancing has the potential to hurt your credit score – whether you’re refinancing a mortgage or a personal loan. For this reason, it’s crucial that you continue making repayments to your old mortgage loan while your new one is being approved and ensure you don’t miss your final payment.
Compare multiple lenders
As with any financial product, the best way to get the best deal is to shop around and compare what’s on offer from the best mortgage lenders. Look at options with both your existing lender and a range of others.
Negotiate fees
Don’t be afraid to speak up and ask for a better deal. If certain fees seem particularly high, see if you can negotiate with your lender. You’ll have a stronger case if you’ve shopped around and have more than one refinance offer open to you.
Avoid buying mortgage points
To reduce closing costs, ask yourself this: are mortgage points worth it? Mortgage points, or discount points, allow you to pay an upfront fee to reduce your interest rate and as a result, your monthly payments will be lower.
However, if you’ve got good credit, you should already be able to access lower interest rates without the need to pay for mortgage points.
Keep the same title insurance company
Ask the title insurance company you worked with when you first bought your home if it can reissue the policy for your refinance loan. If the company agrees, you could save a significant sum of money.
Consider a no-closing-cost refinance
If cash is limited, see whether your lender will offer you a no-closing cost refinance. It won’t be free, but you won’t have to pay anything upfront. Instead, your lender will either charge a higher interest rate or add the closing costs to your loan – the downside is that you’ll pay more over the lifetime of the loan.
Reasons to refinance your home
There are several reasons why you might want to consider refinancing your home. But the main ones include reducing your interest rate, shortening your mortgage term or accessing available home equity.
Mortgage rates are currently at record lows, and this means if you can secure a lower interest rate, you could be one of the millions of homeowners to save a substantial amount of money on your monthly mortgage payments. Alternatively, you may be able to reduce your mortgage term by several years which, in turn, will reduce the amount of interest you pay overall.
Should you need to get hold of additional cash to pay for credit card debts, home improvements or school fees, for example, you may be able to do a cash-out refinance. This will only be an option if you have built up a significant amount of equity in your home over the years.
To find out more about refinancing, make sure you check out our guide on how to refinance your mortgage.
