- Refinancing your mortgage comes with various upfront costs and fees.
- The amount varies, but according to Freddie Mac, you'll usually pay between 2% and 6% of the loan amount.
- There are many strategies you can use to reduce your refinancing costs.
If home title search to make sure you're the owner, and check for any liens you have on the home. If there's a mistake on the title that would jeopardize their investment, the title insurance provides protection to the lender.
Discount points
Discount points are a fee you pay to lower your mortgage rate. You'll usually pay 1% of the loan amount to get an interest rate around 0.25% lower, though the exact numbers depend on your lender.
Prepayment penalty
- Cost range: One to six months' interest payments, if applicable.
Some lenders charge mortgage refinance rates for borrowers who opt for loans without closing costs. Other lenders will add the closing costs to the loan's principal, increasing the total amount you owe, and the total amount you'll pay interest on.
While closing costs might seem high, it's generally cheaper to pay them up front, even if you're paying them a second time around while refinancing.
Is refinancing worth the cost?
Refinancing can be expensive, so it's important to be sure those costs are worth it before you dive in. You can do this by:
Calculating your break-even point
This is the point at which your refinance saves you more than its fees cost. You can calculate yours by taking the total estimated loan costs and dividing that by the amount the refinance will save you each month. The number you get will tell you in which month the savings outweigh the cost.
For example, if the refinance would save you $25 per month and cost $3,000 in fees, you'd have a break-even point of 120 months or 10 years (3,000 divided by 25). If you don't think you'll be in the home for that full 10 years, a refinance might not pay off.
Long-term savings
You can also look at the long-term savings a refinance will net you. For instance, if you're able to pay off your loan five years earlier with a refinance, how much interest will that save you?
You can also think about the other opportunities the refinance could open up. If the refi reduces your monthly payment, does that free up cash you could invest elsewhere? Or maybe put toward other goals? These factors matter, too.
FAQs on refinancing costs
What is the average cost to refinance a mortgage?
The average cost to refinance a mortgage typically ranges from 2% to 5% of the loan amount or about $5,000.
Can refinancing save me money in the long run?
Yes, refinancing can save you money in the long run if you secure a lower interest rate or a shorter loan term.
Are there ways to reduce refinancing costs?
You can reduce refinancing costs by shopping around for lenders, negotiating fees, and considering a no-closing cost refinance.
How do I know if refinancing is right for me?
Calculate your break-even point and compare the long-term savings to determine if refinancing is right for you.
