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Refinancing a mortgage loan typically costs 2% to 6% of the loan amount, which is usually the remaining balance on your original mortgage loan.
Refinancing a mortgage loan is often worth it if you can qualify for a lower interest rate than what you're currently paying, or if you want to switch from an adjustable-rate mortgage to a fixed-rate loan. However, it's important to consider the upfront costs to determine if it's right for you.
Common Refinancing Costs
Closing costs range from 2% to 6% of the mortgage balance, depending on the lender and your situation. Here's a breakdown of some of the fees you may run into.
| Fee | Amount |
|---|---|
| Application fee | $75 — $500 |
| Appraisal fee | $300 — $1,000 |
| Underwriting fee | $300 — $900 |
| Credit report fee | $10 — $100 per borrower |
| Origination fee | 1% — 1.5% of the loan amount |
| Title services | $300 — $2,000 |
| Survey fee | $150 — $400 |
| Attorney fees | $500 — $1,000 |
| Recording fee | Varies by county, sometimes up to $250 |
| Tax service fee | Varies by county, typically equal to six months' worth of property taxes |
In addition to closing costs, your refinance loan will have a new interest rate that will affect your monthly payment. This rate will be determined based on market conditions, the lender you choose and your creditworthiness.
Learn more >> How Does Refinancing a Mortgage Work?
When Is Refinancing Worth It?
Most people choose to refinance their mortgage when interest rates are low, allowing them to save on their monthly payments. However, there are other situations where it can make sense, even if you're not securing a better rate. But even if you do get a lower rate, it's not always cut and dried.
To Lower Your Interest Rate and Monthly Payment
If you qualify for a lower interest rate, take some time to compare your potential savings and the closing costs to ensure it's a good financial decision. An easy way to do that is to calculate your break-even point, or how long you'll need to stay in the house to recoup the upfront costs.
For example, let's say refinancing can reduce your monthly payment by $200, but your expected closing costs are $5,000. To get your breakeven point, you'll divide $5,000 by $200, giving you 25 months' worth of payments. If you expect to stay in the home and not refinance the loan again within that time period, refinancing may make financial sense.
To Change Your Loan Terms
If your budget is tight, refinancing your mortgage loan can also extend your repayment period. Doing so may reduce your monthly payment to a more affordable level. That said, it might also increase your total interest costs.
On the flip side, you could also switch to a shorter repayment period, allowing you to pay off your loan faster. Just make sure you can afford the higher monthly payment.
To Convert an ARM Into a Fixed-Rate Loan
Adjustable-rate mortgage loans (ARMs) typically offer a fixed rate for anywhere from three to 10 years, after which it becomes variable. While the upfront rate is usually lower compared to a fixed-rate mortgage, the loan could become more expensive once the rate starts to fluctuate.
If market rates are on the rise, it could make sense to refinance your ARM into a fixed-rate loan to avoid having your monthly payment skyrocket once your rate starts to change.
To Convert an FHA Loan to a Conventional Loan
Federal Housing Authority (FHA) loans can be beneficial for borrowers with lower credit scores and down payments. However, they can come with costly mortgage insurance premiums, which may never go away.
In contrast, conventional loans only require private mortgage insurance if your loan balance is more than 80% of your home's value. Once you fall below that threshold on an FHA loan, it could make sense to convert it to a conventional loan to get rid of mortgage insurance entirely.
To Use Equity in Your Home
It's also possible to tap some of the equity in your home in the form of a cash-out refinance loan. In this instance, the new loan amount will be higher than the original loan balance, with the difference being disbursed to you in cash.
A cash-out refinance can make sense if you're looking to pay off high-interest debt, cover the cost of home renovations or repairs, pay medical bills or meet emergency needs. Keep in mind, though, that you may end up with a higher monthly payment.
Before considering a cash-out refinance, it's also a good idea to research and compare alternatives, such as a home equity loan or line of credit.
Learn more >> When Should You Refinance Your Mortgage?
No-Closing-Cost Refinancing Options
Some lenders offer no-closing-cost refinance loans, but that doesn't necessarily mean you'll be able to refinance for free. In fact, there are a few different ways a no-closing-cost refinance loan can be structured.
Roll the Closing Costs Into the Loan
In some cases, lenders may simply roll the closing costs into the loan. While this may save you some money upfront, it can cost you a lot more in the long run. As an example, let's say you're refinancing a $300,000 mortgage loan with a 5% interest rate, a 30-year term and $12,000 in closing costs.
Here's how the costs would differ if you choose to roll the $12,000 into the loan rather than paying it out of pocket:
| Paying Closing Costs Upfront vs. Rolling Them Into a Loan | ||
|---|---|---|
| Pay Upfront | Roll Into the Loan | |
| Loan balance | $300,000 | $312,000 |
| Upfront cost | $12,000 | $0 |
| Monthly payment | $1,610.46 | $1,674.88 |
| Total payments | $579,767.35 | $602,958.05 |
In other words, you'd pay an extra $64.42 per month. You'll also pay $23,190.70 more in total, though that's assuming you hold on to the new loan for the full 30-year term. Even if you expect to sell the home soon, those costs will reduce your sales proceeds.
You can use Experian's mortgage calculator to get more concrete details for your situation.
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†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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Higher Interest Rate
Some lenders may offer to pay your closing costs using lender credits. With this arrangement, the lender offers money to offset your closing costs in exchange for a slightly higher interest rate.
Using the same example as above, let's say that the lender offers to cover your closing costs in exchange for a 5.5% interest rate rather than the 5% you qualify for. Here's how your costs may differ:
| Pay Upfront | Lender Credits | |
|---|---|---|
| Loan balance | $300,000 | $300,000 |
| Interest rate | 5% | 5.5% |
| Upfront cost | $12,000 | $0 |
| Monthly payment | $1,610.46 | $1,703.37 |
| Total payments | $579,767.35 | $613,212.12 |
In this case, you'll end up paying more than you would if you were to roll the closing costs into the loan.
No Lender Costs
During periods of high interest rates, lenders may appeal to borrowers by offering a low- or no-cost refinance at some point in the future once rates start to decline. These offers may be referred to as "buy now, refinance later" deals.
However, this may refer only to fees charged by the lender, which means you may still be on the hook for appraisal, title service, survey, attorney, recording and tax service fees. Also, these offers may be time-sensitive. In some cases, you may need to refinance within six months to three years, depending on the lender.
How to Lower Your Refinancing Costs
There are several steps you can take to maximize your savings on a refinance loan. Here are some to consider based on your situation and priorities.
Improve Your Credit
Although you can technically get approved for a mortgage refinance with a FICO® Score☉ of 620—or even 580 with an FHA refinance loan—you'll have a better chance of securing a lower interest rate with a score in the mid to upper 700s or higher.
Start by signing up with Experian to get free access to your FICO® Score and Experian credit report to see where you stand. Then, take steps to improve your credit score based on the information found in your report.
Pay Down Debt
Your debt-to-income ratio (DTI) doesn't influence your credit score, but it's still an important factor for mortgage lenders. More specifically, lenders like to see less than 43% of your gross monthly income going toward debt payments—though some lenders may go as high as 50%.
One way to reduce your DTI is to pay off smaller loan and credit card balances, thereby removing their monthly payments from the equation.
Shop Around
Each lender has its own approach to determining interest rates and closing costs, so it's crucial that you research and compare offers from several lenders. You may even be able to use an offer from one lender to negotiate closing costs and other terms with another.
Consider a Streamline Refinance
If you have a government-backed mortgage loan, such as an FHA loan, Veterans Affairs (VA) loan or U.S. Department of Agriculture (USDA) loan, you may be eligible for a streamline refinance within the same loan program.
Streamline refinances aren't free of closing costs, but because they don't have certain requirements, such as an appraisal or credit check, they may be slightly less expensive compared to a traditional refinance loan.
Make Sure Your Credit Is Mortgage-Ready
Long before you apply for a mortgage refinance, review your credit report for free to get an idea of where you stand. Even if you can get a lower interest rate with your current credit and financial situation, you could save even more if you can build your credit before you apply.