The Costs to Refinancing Your Mortgage

Are you considering refinancing your home and are seeking more information on the costs involved? With mortgage rates expected to fall in 2024, you may be wondering if you’d be able to save money by refinancing a home bought in the last couple of years.

If you bought your home at a rate of under 5 or 6%, there won’t be much reason to refinance and benefit from 2024’s interest rates. However, if you’re paying a rate of above 6%, you may be able to save money in the long run by refinancing should interest rates drop this year. Though, it’s important to consider the costs associated with refinancing before doing so. 

When refinancing your home, you can expect to pay 2-5% of the outstanding balance on your mortgage. These costs can be mitigated during negotiations and through various other tactics. Factors such as your credit score, negotiation skills, and more can affect your final payment.

In this article, we will cover some typical costs associated with refinancing, some tips to avoid these costs and if you are in the right position to consider refinancing.

What Are the Costs Associated with Refinancing?

People don’t often realize that refinancing a mortgage often comes with the same costs as signing your first mortgage. As a general rule, you can expect to pay about 2-5 percent of the remaining balance (aka the new loan amount) when refinancing. 

Let’s take a look at some of the fees that you can expect to pay while refinancing your mortgage. 

Loan Origination Fees are About 1% of the Mortgage

The Loan origination fee is charged by lender as compensation for the entire mortgage process. This is a way for the lender to make profit in addition to the interest they charge on the loan and can cost between 0.5 and 1.5 percent of the loan. 

The good news about loan origination fees is that since they are purely for the lenders profit, they are usually negotiable. While 1% may not seem like a lot, negotiating from 1% to 0.5% on a $300,000 loan can save you $1,500 dollars. 

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Application and Credit Check Fees are an Industry Standard

Most lenders will charge you anywhere from $75 to $300 just to apply for a mortgage regardless if you are approved or not. They spend a lot of time and money on reviewing your application so this is a fairly standard practice across the industry. 

In addition, lenders will also charge you the $25 it takes to run a check on your credit history. Sometimes the application fees and credit check are rolled into the loan origination fees. 

Home Appraisal and Inspection Fees can be Hefty

Even though you aren’t buying a new house lenders will still want to perform a home appraisal to make sure that the home is properly valued. This mandatory service can cost you anywhere from $300 to $1000. 

Additionally, some lenders will also want to perform a termite and pest inspection and complete mold tests. These additional tests can easily cause the inspection fees to go above the $1,000 mark. 

The good news is that if you recently purchased your home or had a recent appraisal or inspection lender’s will often waive this fee as long as the information on the reports is current. 

Survey Fees are for Assessing the Property

In addition to appraising your home, the lender will want to check for any potential defects or encroachments in the land. This fee is another closing cost that you will need to pay for and it can add an additional $150 to $400. 

Much like the home appraisal fee, this can be waived if you recently purchased the house and already had a surveyor come out. You are more likely to get the fee waived if you are refinancing through the same lender that granted you the original mortgage.

Title Search and Title Insurance Fees to Confirm Ownership

When you apply to refinance your home, a lender performs a title search. This process involves searching through court records to confirm that you actually own the property and to see if there are any liens against the property. 

Title insurance is protection for any costs incurred due to errors caused during this process. The search and insurance fees can cost anywhere from $300 to $2,000 dollars depending on your location and the value of the property. 

Attorney Fees are for a Legal Review

Lenders will often charge you for the cost of the lawyer that they either have on retainer or higher to review the closing documentation for your new mortgage. This service costs between $500 and $1000. 

Recording Fees are Paid to the Government

Of course, the government has to get their fair share of your money when signing a refinanced mortgage. You are charged between $25 and $200 depending on location for the local and state government to legally record your new mortgage and any other documents related to the refinancing. 

Processing & Underwriting Fees are for What Goes on Behind the Scenes

While most of your interactions with the lender are through the loan officer, the lender hires a loan processor to gather and process your mortgage documents. 

Similarly, lenders hire an underwriter who reviews and analyzes your loan documents to make the final decision on whether or not you are approved for your loan. These two services combined run from $300-$900. 

The good news is that not all lenders charge a fee for this service. Therefore, it’s a good idea to look into a breakdown of multiple lenders fees to compare. 

Prepaid Taxes & Homeowners Insurance are Collected in Advance

Some additional unexpected closing costs are the prepaid tax and homeowner’s insurance fees. Lenders need to confirm that your home is insured throughout the entirety of the mortgage so that they can recoup their money if something happens to the house. At closing the lender will collect the equivalent of one year’s worth of insurance, which is about $400 to $1,000.

Additionally, most people don’t realize that the lender pays the taxes on a home, while the house is under mortgage. The lender will collect three to eight months’ worth of property tax at closing to cover the cost of the first tax payment on the property. This various based on where you live, but it can add an additional $500 to $5,000.

Early Payment Penalty for Terminating Early

When refinancing your loan, you are essentially asking another lender (or in some cases the same lender) to lend you money to pay off your old mortgage so that you can get a better interest rate with the new lender. 

While lenders are generally moving away from this practice and it is even illegal in some states, lenders will occasionally charge an early payment or early termination fee. This can be up to 80% of six months’ worth of interest. This is an important factor to consider when thinking about refinancing. 

Break Down of Closing Costs for a $350,000 Mortgage 

Now that we have defined and identified some potential closing costs let’s take a look at what those costs would look like in real life. In the following scenario will look at the possible charges for each category when closing on a $350,000 home. 

Estimated Closing Costs on a $350,000 Mortgage

Category	Actual Cost
Loan Origination (%0.5- 1.5%)	$1,750 - $5,250
Application Fee	$75 - $300
Credit Check	$25
Home Appraisal & Inspection	$300 - $1,000
Survey Fee	$150 - $400
Title Search & Insurance	$300 - $2,000
Attorney Fees	$500 - $1,000
Recording Fees	$25 - $200
Processing & Underwriting	$300 - $900
Homeowner’s Insurance	$400 - $1,000
Prepaid Taxes	$500 - $5,000
Early Termination	N/A
Total (1.3% - 4.9%)	$4,325 - $17,075

As you can see all these seemingly small closing fees can add up quickly. That’s why it’s important to research a lender’s fees before moving forward with refinancing your mortgage, because the cost of closing on the mortgage might outweigh the benefits of a lower interest weight. 

The good news about closing costs is that they are usually negotiable. In the next section we will give you some insight on how to lower or even completely get rid of your closing costs. 

Tips for Reducing or Eliminating Closing Costs 

Most people are looking to refinance their home in order to lower the interest rate on their mortgage so that they can save money. However, closing costs while refinancing your mortgage can eat into your savings and make the entire process worthless. Lucky for you there are ways to reduce closing costs so that you can save as much money as possible. 

Shop Around for the Best Rates and Closing Costs

Lenders want your business. If you have already been approved for your first mortgage, made your payments on time and maintained a strong credit score lenders see you as valuable when looking to refinance your home. Lenders will offer you lower interest rates and even waive closing costs to get your business. 

Since lenders only perform a “soft-credit” search when you request a quote, asking for a quote when refinancing will not impact your credit score. Here are some things to consider when shopping around:

• Get at least three different quotes for comparison.
• We recommend a quote from a corporate lender, local lender and a credit union.
• Ask for an interest rate and closing costs.
• Consider if a lower rate or lower closing costs will be more advantageous.

In this case, knowledge is power. The more quotes you have and the more information you can gain from those quotes, the more effective you will be with the rest of our tips. 

Don’t Be Afraid to Work with Your Current Lender

Just like other lenders want to gain your business, your current lender does not want to lose your business. Make sure to get a quote from your current lender before going to a new lender and don’t be afraid to mention that you are thinking about refinancing. 

Your current lender will often waive fees or even match or go lower than a competitors offer to keep your business. This is especially true if your financial situation has changed since your first mortgage. 

Your lender benefits in keeping your business by getting additional closing costs that they wouldn’t have. You benefit by having a lower closing cost than you would’ve with another lender and a lower interest rate on your mortgage. 

Work on Your Negotiating Skills

Having strong negotiating skills during while closing on your refinanced mortgage can make a huge difference in the amount of closing costs you ultimately pay. This is where gathering quotes from multiple lenders is essential. If a lender is charging you a fee that their competitor isn’t, make sure you mention it. 

While using competitor quotes is a great way to negotiate, you should also try to gauge what is negotiable. For example, the loan origination fee is usually negotiable, because its typically pure profit for the lender. While a house appraisal fee may not be negotiable, because they have to pay the appraiser. 

Ask for Fee Waivers

In addition to negotiating down your closing costs, you can ask for a lender to waive a fee all together. This is especially effective when refinancing with the lender who gave you your first mortgage. 

Here are a few fees that you can asked to be waived:

• Application fee - especially if you are refinancing with your current lender.
• Home appraisal - if you’ve had your home appraised within the last year or two.
• Survey fee – if as surveyor has come out recently.
• Title insurance – sometimes this is transferrable from your previous loan

Similarly, to negotiating down costs, it never hurts to ask a lender if they will waive a fee. If you give a good reason, you might be surprised at the result. 

Improve Your Credit Score

Most people purchase their first house when they don’t have the best credit score. Frist time home buyers are often ladled with student or credit card debt. Improving your credit score by paying down debt and making on time payments makes you attractive to lenders when applying to refinance your home. 

One of your best negotiation tools will be a high credit score. If you time refinancing with a time when you have a high credit score you will be more successful in negotiating lower closing costs. 

Lender Credits Should be Used Sparingly

Lender credits are a very useful tool when used efficiently. Essentially, you can ask to lower your closing costs or down payment in return for a higher interest rate. The amount of the credit and how much it increases your interest rate varies by lender. 

This solution should only be used as a last resort. While you won’t have you pay less money now, the increased interest rate often means you pay more over the long-term.  

Most lenders will provide you a breakdown of the cost of paying all of your closing costs, compared to increasing your interest and paying fewer closing costs.

Don’t Pay Any Closing Costs

That’s right, you may not have to pay any closing costs! Sound too good to be true? It usually is. There are some lenders that will offer you a refinanced mortgage without having you pay any closing costs out of pocket. 

This works just like lender credits, you don’t pay any costs now, but those costs are rolled into your mortgage payment via a higher interest rate. In most cases you will pay more in the long run. 

This tactic might be necessary if you can’t afford your current mortgage payments now and don’t have enough money to pay closing costs on a refinanced mortgage, but you should consider the long-term financial implications before agreeing to the new mortgage. 

Additional Money Saving Tips When Refinancing

While reducing or eliminating closing costs can save you a lot of money while refinancing your home, there are some other situations when refinancing could save you a lot of money. 

You Can Get a Lower Interest Rate

If you are making higher than average payments on your current mortgage, then you should consider refinancing. Typically, if you can reduce your interest rate by at least 0.75%, then you will save money in the long run. This is especially effective when you only have about 20% to 50% equity in your home. 

You Have an Adjustable Interest Rate

If you have an adjustable interest rate on your current mortgage it is best to get out of said mortgage as quickly as possible. If you can find a favorable fixed-interest rate mortgage, then you won’t have to worry about a spike in the interest rate at an inopportune time. 

Get Rid of Private Mortgage Insurance (PMI)

If you weren’t able to pay 20% down on your first mortgage and have PMI included in your monthly payment, it’s best to refinance once you have 20% equity in your property. This eliminates the additional payment you are making on PMI and will lower your monthly payment and total amount paid. 

Make the Choice That is Right for You

Ultimately it is important to make the choice that is right for you. No two people have the exact same financial situation, which means that there is no one-size fits all solution for saving money while refinancing your mortgage. If your tight on cash, it may make sense to pay no closing costs and take a higher interest rate. 

Likewise, if you savings in the bank, but have 75% equity in your home, then making a large payment on your current mortgage might make more sense, then refinancing to get a better interest rate. Ultimately, if you use the knowledge gained from this article and take your financial situation into consideration you will make the right choice for you. 

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