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Whether you want a lower interest rate, longer repayment term, or cash from your home’s equity, you might be thinking about refinancing your mortgage — replacing your current home loan with a new one. But a mortgage refinance is not free. Here’s what you need to know about refinance costs to decide if it’s right for you.
Learn more: Everything you should know about refinancing a mortgage
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When you refinance a mortgage loan, you’ll pay closing costs similar to those you paid when you bought the home. Refinance closing costs cover fees for processing and finalizing the transaction and can be 2% to 6% of the loan amount. For example, refinancing a $400,000 mortgage could cost you $8,000 to $24,000. The amount you’ll pay varies depending on various factors, such as your location and which mortgage lender you use, but here’s a general breakdown of common refinance costs.
Dig deeper: When it makes sense to refinance your mortgage
Your costs will depend on your mortgage lender, which type of refinance you’re pursuing, and more. But here are some of the most common refinancing closing costs and what you can generally expect to pay.
In addition to the above costs, you may need cash to cover the first one or two months of homeowners insurance and property taxes.
Keep learning: Want to refinance your mortgage? Here are 7 types of refinancing.
The cost of refinancing a home loan can differ based on the following details:
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Loan amount: Several fees are a percentage of the loan principal. The higher the loan amount, the more you can expect to pay in closing costs.
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Location: Certain costs, such as recording fees and taxes, are governed by local laws, so where you live determines how much you pay.
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Credit score: A mortgage refinance is a loan, so lenders will still use your credit score and history to determine your ability to repay. Mortgage lenders tend to offer lower interest rates to applicants with higher credit scores.
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Home equity: Lenders generally require private mortgage insurance (PMI) if you have less than 20% in home equity, which is your home’s value minus the outstanding mortgage. You won’t have to pay PMI if you have at least 20% equity when refinancing a conventional loan.
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Lender: Lender fees — like those for underwriting, originating a loan, and submitting an application — depend on your chosen lender. For example, some mortgage lenders don’t charge an application fee.
Learn more: What are mortgage lender fees, and how do they differ from other closing costs?
It’s pretty much impossible to avoid all refinancing costs, but there are ways to pay less.
Lenders generally reward creditworthy homeowners with lower interest rates, and a strong score could give you more power to negotiate fees. A “good” FICO score is at least 670, while exceptional scores are 800 or higher. You can improve your score by making on-time payments, paying down debts, and checking your credit report for any errors that need correcting.
Learn more: 9 options for refinancing your mortgage with bad credit
See what refinance rates you qualify for with your current lender, but don’t stop there. Prequalify with multiple lenders, comparing interest rates, fees, and other loan terms to ensure you get the best deal.
Read more: The best mortgage refinance lenders
Not all closing costs are negotiable, but some are. Ask your loan officer which fees can be waived or reduced. You may have more leverage negotiating if you have good to excellent credit, a lower debt-to-income ratio (DTI), and other factors that signal an attractive borrower.
Dig deeper: 7 strategies for reducing closing costs
A lender may offer a no-closing-cost refinance, but it’s important to read the fine print. In many cases, you won’t have to pay the fees up front, but you’ll end up paying them in some other way. A lender can roll the costs into the loan (leaving you with a larger mortgage principal) or increase your interest rate to compensate. Either way, you’re not paying anything at closing, but you’ll pay more in interest overall.
Similarly, you can lower or eliminate how much you pay up front by asking for a lender credit, which is when the lender reduces or removes your closing costs in exchange for a higher interest rate.
Whether a refinance is worth it depends on your goals and finances. If you qualify for a lower rate, a refinance could save you significantly in interest. If you need a lower monthly payment, you can extend your loan, although you’ll pay more interest. Use a mortgage calculator to see how much you can save by refinancing and make sure you can afford the 2% to 6% you’ll likely pay in closing costs. Think about your break-even point. For example, let’s say the savings from your lower interest rate will take three years to offset your refinancing closing costs — but you only plan to stay in the house for two more years. In this case, you won’t reach your break-even point before moving, so refinancing probably isn’t worth it.
Your existing mortgage lender may offer discounts or deals if you refinance with them, but that’s not always the case. It’s best to look at offers from multiple lenders, comparing interest rates, repayment terms, and discounts. If you find a better deal with a new lender, you can always ask our current lender to match the offer.
A lender may offer a no-closing-cost refinance that involves waiving certain fees, such as the application, origination, and underwriting fees. However, some no-closing-cost options don’t lower your expenses at all. Instead, the mortgage provider rolls the fees into the loan or raises your interest rate — saving you money in the short term but increasing your overall costs. Before moving forward with a no-closing-cost option, make sure you understand which fees are covered and how the option impacts your loan principal or interest rate.
This article was edited by Laura Grace Tarpley.