Refinance closing costs: Typical fees and how to avoid them
How much does it cost to refinance?
Homeowners typically refinance to save money. Refinancing often results in a lower interest rate and monthly payment, and it can save you thousands over the life of your loan.
However, refinancing your mortgage isn’t free. The process involves paying closing costs, which average between 2% and 5% of the loan amount.
The good news is that refinance closing costs are negotiable. And it’s often possible to refi with no closing costs at all if you play your cards right. Here’s how.
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What are refinance closing costs?
Closing costs are lender fees and third–party fees you pay when getting a mortgage. You have to pay these on a refinance just like you did on your original mortgage.
Closing costs aren’t a set amount, though. They vary depending on where you live, your loan amount, your lender, the loan program, whether or not you’re cashing out your home equity, and other factors.
How much are refinance closing costs?
Mortgage refinance closing costs are generally between 2% and 5% of your loan amount. In 2021, that figure averaged about $6,800 for a single–family home.
Since refinance closing costs are partly based on your loan amount, they can vary a lot from one borrower to the next. Yours might be higher or lower than average depending on your home’s value, your mortgage balance, and whether or not you’re taking cash out.
List of refinance closing costs
Major closing costs you’ll pay when refinancing a mortgage include:
- Loan origination fee: 1%–1.5% of the loan amount
- Discount points (optional): 0%–1% of loan amount or more
- Application fee: $75–$300
- Credit check fee: $25
- Home appraisal fee: $500–$1,000+
- Title search and title insurance: $300–$2,000+
- Survey fee: $150–$400
- Attorney fees: $500–$1,000
- Recording fees: $25–$250 (depending on location)
- Processing and/or underwriting fee: $300–$900 each
- Prepaid taxes and homeowners insurance: varies
These are just the big–ticket items. You can see a full list of typical closing costs and amounts here.
Can you negotiate closing costs when refinancing?
The good news is that some refinance closing costs are negotiable, especially lender fees charged directly by your mortgage company.
You can often negotiate the following refinance costs:
- Loan application fees
- Loan origination fees
- Underwriting fees
- Homeowners insurance premiums (by selecting cheaper policies and customizing coverage)
- Title insurance (shop for discounts and ask the title company to waive add–on fees for items like copying or courier charges)
However, there are some non–negotiable expenses, too. Your loan officer likely won’t be able to lower fees charged by third parties such as the survey, home appraisal, or recording fees. Lenders simply pass these fees along to you, the borrower.
Always compare closing costs and refinance rates from multiple lenders
You should always get multiple mortgage quotes from at least three lenders, including your current mortgage company. Then compare your Loan Estimates to find the lowest–cost option.
Comparing upfront fees and interest rates can help you save money. And if you find a lender with a cheaper loan origination fee, application fee, or underwriting fee, this sways the negotiating power in your favor.
You can refinance with the lender offering the lowest rate and fees at face value. Or you can use your other offers as leverage for negotiation.
Your current lender might match the competitor’s fees or waive certain refinance costs to keep you as a customer.
How to refinance with no closing costs
It’s possible to avoid closing costs altogether when you refinance. But you’ll need to understand the benefits and drawbacks of no–closing cost refinance methods – because they can wind up costing you more in the long run.
Roll closing costs into your loan
Your lender might allow rolling your closing costs into your mortgage loan if you have enough equity in the home. The benefit of this approach is that you don’t pay anything upfront.
On the other hand, rolling these upfront costs into your new mortgage increases your loan balance, meaning you’ll pay interest on this additional amount. This can result in paying thousands more over the life of the loan.
Still, rolling closing costs into your loan can make sense when you save a fair amount of money on your monthly mortgage payment. This is especially true when your primary refinance goal is to save money each month.
Ask the lender to pay your closing costs
Another no–closing–cost refinance method is to ask for lender credits. This limits your out–of–pocket costs, but you’ll pay a higher mortgage rate in exchange.
Lender credits are typically better for homeowners who will keep their new mortgage for only a few years. After that, the higher interest cost can start to outweigh the upfront savings.
If you plan to keep your refinanced loan long–term, rolling closing costs into the mortgage balance might make more sense.
Should you pay refinance closing costs out of pocket?
Take a close look at your financial situation when deciding the best way to pay your refinance closing costs.
If you have sufficient home equity, it might be worthwhile to add your refinance closing costs to your mortgage balance to avoid an out–of–pocket expense.
This also makes sense when you don’t have much money saved, or if you don’t want to deplete your personal savings when refinancing.
However, rolling closing costs into your loan increases the loan balance, your monthly mortgage payment, and your total interest charges. So if you can spare the cash, it might be better to pay your closing costs out–of–pocket and be done with it.
Pay prepaid items upfront if you can
At the very least, you should try to pay your homeowners insurance and property tax reserves out–of–pocket. You’ll receive a check from your current lender for a similar amount a few weeks after closing.
Lenders hold an escrow account for necessary items but refund the balance to you when you refinance or pay off the loan. Because this is such a temporary cash outlay, it doesn’t make much sense to add that to your new loan balance and pay it off over many years.
However, if you want to raise some cash without doing a cash–out refinance, you could roll taxes and insurance reserves into the new loan and get a sizable check weeks later from your current lender.
If you’re not sure which refinance option makes the most sense, your loan officer or mortgage broker can help you compare the upfront and long–term costs on a few different loans and help you decide.
Ultimately, your personal finances and specific needs should help guide your decisions.
How refinance closing costs are determined
Average closing costs normally range from 2–5% of the loan amount.
If you’re refinancing a $200,000 mortgage loan, for example, you could expect to pay between $4,000 and $10,000 in closing costs.
This is a wide price range. Whether you’re on the high or low end of this range depends on several factors.
- Mortgage lender: Lenders charge different upfront fees, so some will have more expensive refinance closing costs than others. You don’t have to refinance with your current lender; you should shop around for a lender with the lowest rate and fees for your new loan
- Interest rate: Your lender will charge prorated mortgage interest, starting from the date of closing to the first day of the following month. You’ll pay this upfront payment at closing, and your interest rate determines the exact amount
- Lender credits: Some lenders will extend borrowers ‘lender credits.’ This can eliminate the loan origination fee and potentially other closing costs in exchange for the borrower paying a slightly higher interest rate. Receiving a lender credit can lower, or even eliminate, your upfront costs, but the higher rate will cost you more in the long run
- Discount points: Discount points or ‘mortgage points’ are the opposite of lender credits. This is an upfront fee you pay at closing to get a lower interest rate. Each discount point usually costs 1% of the loan balance and reduces your interest rate by about 0.25%. For example, if you pay two discount points on a $200,000 loan, you’ll pay an additional $4,000 in closing costs to shave about 0.5% from your mortgage rate
- Location: Refinance closing costs include prepaid property taxes and insurance, just like your original home loan. Your location will impact these amounts, especially the cost of your prepaid property taxes. But you really aren’t paying extra taxes and insurance to refinance – your current lender refunds any amount it holds in reserve
Loan types affect refinance closing costs, too
You might also pay more or less money at closing depending on your loan type.
FHA loans
If you’re refinancing into an FHA home loan, which is a government loan backed by the Federal Housing Administration, you’ll pay an upfront mortgage insurance premium (UFMIP) equal to 1.75% of the loan amount. You can roll this fee into the loan or pay it upfront at closing.
“If you are currently in an FHA loan, some of this may be rolled over from the upfront MIP you initially paid,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
USDA and VA loans
VA loans and USDA loans have similar insurance charges (called the funding fee and the upfront guarantee fee, respectively), which can also be included in the loan amount.
Cash–out refinances
Be mindful that cash–out refinances often involve higher closing costs since you’re increasing the total loan amount. A cash–out refinance is when you borrow cash from your home’s equity.
Refinance closing cost FAQ
Closing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third–party fees. Refinancing involves taking out a new loan to replace your old one, so you’ll repay many mortgage–related fees. These include the loan origination fee, appraiser’s fee, credit report fee, application fee, and attorney fees. You might also pay additional fees such as discount points to reduce your interest rate.
It is sometimes cheaper to refinance with your current lender. Your current lender might reduce the cost of certain services or waive select fees to keep you as a customer. Still, you should always shop around and get at least three mortgage refinance quotes from different lenders to compare costs, rates, and terms. Another lender’s lower rate or fees might negate the savings you’re offered by your current mortgage company.
Mortgage lenders sometimes allow borrowers to roll closing costs into their new mortgage loan. But keep in mind that rolling closing costs into your new loan will increase the total loan amount. And this is an option only when the homeowner has enough home equity to back a larger loan amount. If you don’t have enough home equity, a larger loan may exceed the lender’s loan–to–value (LTV) ratio.
A 1 percent rate drop can often result in significant monthly savings and help you save on interest over the life of the loan. However, each homeowner’s situation is different. Those with a small loan balance may not benefit, even with a 1 percent rate drop. But those with a large balance could save significantly with just a 0.25 percent drop. You should evaluate your refinance options based on your current interest rate, new interest rate, loan balance, and overall financial situation. A refinance calculator can help you estimate your savings.
Most lenders will require an appraisal before refinancing. An appraisal determines a property’s real estate value, and it’s necessary because lenders will not lend more than a home is worth. Your home’s value might have changed since you bought it, so a refinance appraisal determines the current market value. However, FHA, VA, and USDA loans have Streamline Refinance options which often don’t require a new appraisal.
You’ll need at least 20 percent equity to avoid private mortgage insurance (PMI) when refinancing. If you have a conventional loan and refinance with at least 20 percent equity, you will no longer have PMI. If you have an FHA or USDA loan with at least 20 percent equity, you’ll need to refinance into a conventional loan to eliminate mortgage insurance since these loan types always require it. Only VA loans require no ongoing mortgage insurance, regardless of your down payment or home equity.
Lenders will check a borrower’s credit score and credit report to ensure they meet the minimum credit requirement for a loan program. Typically, you’ll need a minimum FICO score of 620 for a conventional loan and a minimum of 580 for an FHA loan. The only exception is applying for a Streamline Refinance of your FHA, VA, or USDA loan. In this case, a credit pull might not be required.
Refinancing might not be a good idea if your credit score needs improvement. If you’re not eligible for the best interest rates, the cost of refinancing might not be worth it. You might also hold off on refinancing if you don’t plan to keep the mortgage long. You typically want to keep the loan long enough to recoup what you paid in closing costs unless you opt for a no–cost refi.
Lenders will check your credit report, and each inquiry can reduce your credit score by a few points. However, multiple inquiries from rate shopping count as a single inquiry when completed within a 14– to 30–day window. Keep in mind, too, that refinancing pays off and closes your old mortgage loan. Some credit scoring models don’t factor in the history of closed loans when calculating scores, so your credit score might dip slightly after refinancing.
Some homeowners can maximize their savings by refinancing into a different loan type or different loan term. For instance, homeowners with 20 percent equity can refi from an FHA loan to a conventional loan and eliminate PMI costs. Refinancing from a 30–year term to a shorter term, like a 15–year loan, could also net you a lower interest rate and big long–term savings. But your monthly payments would be higher. Refinancing from an adjustable–rate mortgage to a fixed–rate mortgage could also help you save by locking in a lower interest rate for the long term.
Fannie Mae and Freddie Mac recently removed a fee called the adverse market refinance fee. This additional closing cost was 0.50 percent of the loan amount, and it was charged to all cash–out refinances and rate–and–term refinance. However, this surcharge has expired.
What are today’s refinance rates?
Just like rates for homebuyers, mortgage refinance rates are low across all loan types right now, including rate–and–term and cash–out refinances.
It’s a great time to lock in a low interest rate on your new loan, and many homeowners can choose to refinance with no closing costs.
Check your refinance options to see if a refi is worth it for you at today’s rates.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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