What Does it Cost to Refinance a Mortgage?
There are many benefits to refinancing your mortgage. You can lower your interest rate, shorten your loan term, access cash, or even consolidate high-interest debt. They're all great options that can help you save an incredible amount of money over the life of your loan. You may even be able to save up to $1,000 a month!
But what does it cost to get to those savings? Do you pay the same fees as you did for your original home loan?
The short answer: yes, for the most part. Since it’s a new loan that takes over your existing loan, there are costs involved. When asking yourself, “should I refinance my mortgage?”, take the time to understand just how much “cost” you could be looking at.
Closing costs on a mortgage refinance
About half of your mortgage closing costs go to a third-party for services necessary to complete the transaction. In total, you may be looking at anywhere from zero dollars to several thousand to refinance your mortgage.
Why the large spread? Well, closing costs are dependent on the state you live in, the loan program you choose, your loan amount, the lender you choose, your rate, and even the third parties (title/inspection/appraisal companies) that are used.
How do you fall into the lower end of that overall cost category? Shop around! The section below further explains some of the specific fees and costs to refinance a mortgage.
Mortgage refinance fees
Believe it or not, there are some banks and lenders out there who charge borrowers a fee to do business with them. It’s what’s called an application fee, and it can cost you up to $500 upfront. This can be avoided if you choose a lender with no upfront fees, like American Financing.
Appraisal fees cannot be avoided in most cases. And, you can no longer shop around for appraisal companies as a result of the new Appraiser Independence Requirements. The Appraiser Independence Requirements replaced the Home Valuation Code of Conduct (HVCC) laws, which were put in place after the last real estate collapse. Since almost all appraisers are self-employed individuals, they can charge what they deem necessary for their services. They are typically pooled into an Appraisal Management Company (AMC) to receive work orders from mortgage lenders and bankers. Keep in mind: the hotter your real estate market, the greater the demand for appraisals, which could translate into a longer wait time to get your loan completed. So it’s important to understand that wait times are typically out of the control of your lender.
Typical appraisal price ranges for appraisals are as follows;
Conventional loans usually cost somewhere between $500-$650
FHA almost always costs at the higher end of this spread at $650
VA loans run up to $750 for an appraisal
Anything in a rural area or considered a unique property type can range from $750 and higher, even over $1,000
These fees are charged by the AMC or appraiser directly and not by the lender. To pay for the appraisal fees, over 90% of lenders require their borrowers make a one-time, upfront check or online payment. This protects lenders from borrowers who start the process, complete the appraisal, and afterward either change their mind or do not qualify for the loan. Believe it or not, paying for appraisals can put even the most established lenders out of business if there are too many borrowers who don’t qualify or change their mind.
To repeat what was mentioned earlier: at American Financing, there are no upfront, out of pocket costs associated with loans. So this is another mortgage refinance cost you need not worry about right away.
The origination charge covers the processing, underwriting, administrative, and document costs of the loan. It is typically included in the total loan amount to avoid any upfront, out of pocket costs. Expect to pay around 1-1.5% of your principal balance to make up these charges. So, if you have a principal balance of $250,000, expect to pay around $2,500-$3,750. It’s rather minimal when you consider you’re borrowing $250,000.
May be required
Mortgage points are fees paid at closing in return for a lower interest rate. Essentially, you pay a little more to lower your monthly payment and potentially save thousands in interest over the life of the loan. One “point” equals 1% of the total amount of your home loan (or more simply $1,000 for every $100,000 borrowed). Most of the time, however, it’s usually not cost effective to pay to buy down the rate. Be sure to let your dedicated mortgage consultant help determine if this is financially beneficial for your situation.
Title insurance and search
This fee covers the cost of searching the property's records to ensure that you are the rightful owner and to check for liens. Title insurance covers the lender against errors in the results of the title search. If a problem arises, the insurance covers the lender's investment in your mortgage. So, if someone should someone lay claim to monies owed before that refinance transaction took place, the title insurance will have to pay for it (should it be a valid lien). Cost range = $500 to $800, and sometimes more, depending on the loan amount. Be advised that while you can choose a different title company when refinancing your home, it’s usually a good idea to use the title company the lender recommends. This is because they’ll more than likely have a great working relationship with this third party company and that in turn means lower title cost and quicker turnaround times.
May be required
If you have a government-backed loan like an FHA or VA loan, it’s highly likely you’ll need an inspection — even if you’re refinancing your mortgage. The inspection is necessary because it looks at the overall condition of the home (whereas an appraisal determines the home value). The lender may require a termite inspection and an analysis of the property’s structural condition. Some even require septic system and water tests to ensure an adequate supply of water for the house.
Your city or county may charge a recording fee for handling the refinance paperwork. Though costs are relatively low, they can be upwards of $250. Be sure to visit your local government website or ask your mortgage lender.
Typically not required
Depending on your lender, you may be charged a prepayment penalty for paying off your existing mortgage early. These are typically not required anymore if you have a fixed rate first mortgage. But, it’s still important to ask about.
No cost mortgage refinance
Depending on your particular situation, you may be inclined to ask for a “no cost” loan. This means the lender will pay for all loan costs, including their fees and third-party fees (appraisal, title, recording charges, etc.).
Most of the time a “no cost” loan is utilized when doing a cash out loan so you can access as much money as possible. Though, this will lead to a higher interest rate to compensate the lender for not charging anything upfront.
It’s not the right solution for everyone, so be sure to consult with a mortgage consultant who is salary-based and not paid commission. This way, you can feel confident you’re not being pressured into the wrong program.
Calculate your refinance savings
Your break-even point is how long it would take for you to repay the costs to refinance a mortgage. It’s worth looking into before making your decision. You can also use a mortgage refinance calculator. Let’s put all of this together and figure out how much the net refinance cost will be. Remember, it’s not all that it seems to be and it’s usually better than you might think.
Let’s consider this example.
Say you want to refinance your current $300,000 30-year mortgage.
The original payment started in January of 2010 with a 5.49% interest rate.
Your goal is to lower your interest rate in hopes of saving more money over the long run.
Your current payment (principle & Interest) is $1,701.
If you end up being approved for a $240,000 20-year mortgage at a 4.75% interest rate, you could be looking at $150 in monthly savings, over $48,000 in lifetime savings, and the ability to pay your mortgage off almost 3 years early!
When it comes to costs, always remember: don’t just look at the numbers on a refinance calculator and think of how much you’re spending to refinance your house. Look at the numbers on the page and see how much you’re going to save!
What to expect during the refinance process
If you choose to refinance with American Financing, here’s a basic overview of what you can expect.
Just want to learn more? We can have a quick discussion about refi benefits with no obligations whatsoever.
Start your application
Online, over the phone, or in person — we’ll learn your needs.
With your approval, we’ll start income verification and a credit check.
Review loan options
We’ll present a mortgage program that makes sense for you.
Collect financial documents
Access our secure online portal to submit your information.
Documents are organized for a thorough financial review.
Quick evaluation to determine your home’s value.
Almost ready to fund, but additional documents may be needed.
Once conditions are satisfied, we’ll prepare documents for signing.
Sign your documents and we can close within three days, meeting wherever is convenient for you.
Where to start your mortgage refinance
Now that you have an idea of the costs, fees, and even the process to refinance, your next step should be a 10-minute call to an American Financing salary-based mortgage consultant. There are never any upfront fees to consider. Plus, we have access to every loan in the industry, so you can feel confident your refinance needs are being met quickly and are in line with your budget. Make the call today: (800) 910-4055!