How Much Does It Cost To Refinance?

28, June, 2024

Homeowners seek to refinance their mortgage agreements for many reasons. The prospect of lower interest rates, shorter terms, and affordable home improvements are all frequent drivers of looking for mortgage refinancing. 

While applying for refinancing with a fixed-rate loan or adjustable rates is common among those with mortgages, the overall cost of refinancing is markedly similar to closing costs on the original purchase. That’s because the refinance process involves overhauling your current mortgage agreement with a brand-new mortgage agreement.

Property owners seeking to refinance must ensure their savings on lower interest rates will sufficiently compensate for the other fees associated with refinancing. Here’s what you need to know on how to refinance a mortgage, including the most common costs and concerns about the process.

How to Refinance Your Mortgage

Mortgage refinancing involves replacing your original mortgage agreement with a completely new one. The most typical motivation is to obtain more favorable interest rates and loan terms. Common options include a cash-out refinance that accesses home equity for home improvements or debt consolidation.

Adjustable-Rate Mortgage

Couple sits down with mortgage loan officer to calculate how much it would cost for them to refinance.

An adjustable-rate mortgage — or an ARM — is based on a new interest rate that adjusts from time to time based on specific index rates. These mortgages often involve rate caps that exit for the complete life of the loan. However, the uncertainty of interest rate cuts or increases can make monthly payments difficult to plan.

Fixed-Rate Mortgage

A fixed-rate mortgage makes monthly payments more predictable, as interest rates never change over the life of the loan. Other potential options include FHA and VA refinancing, and interest-only mortgages.

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Common Refinancing Costs

Several factors impact the cost to refinance a mortgage, including the following:

Loan Origination Fees

Lenders charge fees for processing new loan applications. These fees usually account for 0.5% to 1% of the refinanced loan and cover basic administrative costs.

Loan Application Fees

Usually non-refundable, loan application fees cover credit checks, evaluations, and other expenses related to administrative tasks.

Title Service Fees

Title service fees address the expenses of verifying that the property has no claims or liens against it. They usually include title insurers and search fees.

Home Appraisal Fees

To refinance a mortgage, owners almost always must have a home appraisal conducted. An appraisal in the United States is on average $550 for a single-family home.

Attorney Fees

Mortgage refinancing involves preparing and reviewing loan documents and ensuring regulation with local laws. These fees can command a significant amount of overall costs.

Government Recording Fees

A refinance agreement must be recorded with local authorities so that the interests of the borrower and lender are protected. This process involves paying a nominal fee.

Additional Considerations

To refinance a mortgage and determine how much you’ll pay, you’ll need to take a few additional areas into consideration, including the following:

Credit Score

A positive credit report makes life easier for loan borrowers. It can result in lower interest rates and more favorable terms. Lenders also look at your debt-to-income (DTI) ratio to evaluate your ability to manage the debt you owe, such as credit cards. The lower the ratio, the better your chances of better terms.

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Where your property is located can dictate the cost of labor — one of the biggest drivers of mortgage refinancing. Areas with higher costs of living usually command higher fees in construction, appraisal, and valuation. Homes in remote locations that are harder to access may also command higher fees.

Loan Type

Qualified borrowers with FHA, VA, and USDA loans are usually subjected to percentage increase limits, while a cash-out refinance typically costs more. Look carefully at the terms of the type of loan you take out.

4 Tips for Minimizing Refinancing Costs

If you’re seeking to refinance a mortgage, here are some measures you can take to save on the most common costs.

1. Improve Your Credit Score

By paying your bills on time, maintaining low balances, and restricting the number of new credit accounts you open, you can improve your credit history, which can help you obtain more favorable loan agreements. 

You can access your credit report for free once every year with each credit reporting agency — Experian, Equifax, and TransUnion. If you see inaccurate or erroneous information, file a dispute to get the issue resolved.

2. Compare Rates and Loan Products

Lenders come in different forms and rate structures. A key way to save when you refinance a mortgage is to compare the terms, limitations, and expenses of several refinance products and options.

3. Consider Buying Mortgage Points

You may be able to pay an upfront fee to lower your interest rates when you refinance a mortgage. Generally, a single point costs around 1% of your loan amount and can reduce your interest rate by 0.25%. 

This method is advised for homeowners who plan to live on their properties for a long time. It’s not recommended for those with short-term intentions.

4. Stick With Your Original Title Insurer

Your original title insurer is already familiar with your property’s title history. They often offer a discount on a new policy premium, which can have a significant impact on your closing costs. Customer loyalty also helps to make sure your property rights are properly protected.

Final Thoughts

Refinancing your mortgage can be a strategic move for homeowners. You could secure lower interest rates, better loan terms, or funds for home improvements.

Understanding the costs and steps involved is crucial for making informed decisions. You can save on refinancing expenses by improving your credit score, comparing rates, and exploring options like mortgage points.

Contact a trusted mortgage lender to get started and ensure you’re getting the best deal. They can guide you through the process and help tailor a refinance package that meets your financial goals and needs.

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