How Much Does It Cost to Refinance a Mortgage?

The cost to refinance a mortgage so you can lower the interest rate on your loan or change the payoff period depends on several factors, including the size of your loan. Generally, you can expect costs to refinance to be about 2% to 6% of the loan amount. Freddie Mac, which buys and guarantees mortgages, puts the typical cost of refinancing a mortgage at roughly $5,000.

Here, learn how mortgage refinancing works and about the associated costs.

What Is a Mortgage Refinance?

A mortgage refinance is when you get a new mortgage to replace your current mortgage for a lower interest rate, a new term, a lower monthly payment, a new set of borrowers, or some combination of those. A type of refinancing known as a cash-out refinance mortgage lets you convert some of your home equity into cash.

No matter the type of refinance, the mortgage refinance lender pays off the old mortgage with the new one.

How Much Does It Cost to Refinance a Mortgage?

A number of expenses are included in the cost of refinancing a mortgage. Costs you might pay include:

• Application fee: Some lenders might charge a loan application fee, perhaps around $550, when you submit your documents for review.
• Loan origination fee: The loan origination fee covers expenses tied to processing, underwriting, and administering the loan, as well as the cost of producing loan documents. This fee might be 0.5% to 1% of the loan amount.
• Appraisal fee: A professional conducts an appraisal to determine the value of your home. An appraisal fee for a single-family home might run $300 to $500.
• Recording fee: A city or county might charge a fee for handling paperwork associated with your refinancing. The average recording fee is about $125.
• Credit report fee: A mortgage lender will pull a copy of your credit report when it’s considering your refinance application. This fee is usually $35 to $50.
• Title search and insurance: A title company will perform a title search to confirm home ownership. On top of that, a title insurance policy kicks in if a dispute arises over the title. This fee might range from $500 to $1,500.
• Attorney’s fee: In some states, you must pay an attorney to review and file paperwork for your refinancing. The cost varies from state to state.

Before deciding to refinance your mortgage, consider whether the costs outweigh the benefits. In some cases, you might find that refinancing expenses water down the financial advantages. But if the math turns out to be in your favor—meaning, for instance, that you’d save thousands of dollars in interest charges—refinancing might make sense.

What’s Negotiable

You may be able to negotiate certain elements of your refinancing, especially if you’re working with your existing lender. Among the items that may be negotiable are:

• Loan application fee
• Loan origination fee
• Title insurance

Some costs might not be negotiable, however. These include:

• Appraisal fee
• Credit report fee
• Recording fee

How to Estimate Your Refinance Costs

Ideally, you should use an online calculator to estimate the costs of refinancing your mortgage. Online calculators you might try include those from Bankrate, Bank of America, Fannie Mae, Rocket Mortgage, and Zillow.

If you don’t want to go the calculator route, chat with a mortgage lender—perhaps your current lender—to get an estimate of the costs of refinancing your mortgage.

Hidden costs to look out for include:

• Private mortgage insurance (PMI): If your home equity is less than 20% of the value of your house, you’ll be required to buy private mortgage insurance (PMI) if you’re taking out a conventional loan.
• Prepayment penalty: If you refinance your mortgage within three years of first getting it, you might end up paying a prepayment penalty. This penalty, charged for the early payoff of your original mortgage, is 1% or 2% of the outstanding loan balance.

When Should You Refinance Your Mortgage?

When is it the right time to refinance? Here are some situations when it might be a good idea to refinance your mortgage.

• You want to reduce your interest rate: It generally makes sense to refinance if you can lower the interest rate by 1 or 2 percentage points. Lowering the interest rate can save you a significant amount of money in the long term.
• You want to shorten your loan term: Switching from, say, a 30-year loan to a 15-year loan can help you pay off your loan faster. However, it will increase the amount of your monthly payment.
• You want to lower your monthly payment: Increasing your loan from 15 to 30 years, for example, might lower your monthly payment. However, this strategy could result in paying more in total interest.
• You want to change your loan type: You may want to change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for predictable payments. Or, you may want to take advantage of lower initial rates with an ARM.
• You want to tap your home’s equity: Cash-out refinancing enables you to access the home equity that you’ve accumulated. In this scenario, you swap your current mortgage for a mortgage with a higher amount, and then carve out a share of the home equity to cover college expenses, undertake a home improvement project, or consolidate debt, for example.
• You want to avoid private mortgage insurance (PMI): You may be able to ditch PMI for a conventional loan—or mortgage insurance premium (MIP) for an FHA loan—by refinancing into a type of mortgage that doesn’t require mortgage insurance.

How to Determine the Break-Even Point

The break-even point refers to when you’ve saved enough money through the refinancing—by paying less interest, for example—to offset the refinancing costs. You can determine the break-even point by doing some basic math.

Let’s say your refinancing costs total $5,000 and you lowered your monthly mortgage payment by $200. To calculate the number of months it’d take to reach the break-even point, you’d divide $5,000 by $200. The result: 25 months (5,000 ÷ 200 = 25). So, you’d hit the break-even point in about two years.

How to Reduce Refinance Costs

While you initially might be put off by the costs of refinancing your mortgage, you can find ways to cut the costs. These include:

• Boosting your credit score: Improving your credit score can result in a lower interest rate for a mortgage refinancing.
• Comparing mortgage offers: By comparing rates and terms from several lenders, you can identify a loan that best suits your needs.
• Negotiating with lenders: Some lenders may be willing to negotiate fees and other elements of your loan.
• Assessing whether to buy mortgage points: When you purchase mortgage points, you’re prepaying interest in exchange for a lower interest rate and lower monthly payments.
• Considering no-closing-cost refinancing: With a no-closing-cost mortgage, you pay the expenses over time rather than upfront or you pay a higher interest rate. This strategy might result in higher mortgage costs in the long run, however.
• Asking about a break on title insurance: Depending on where you live, you might qualify for a title insurance discount when you refinance your mortgage.

The Bottom Line 

Covering the costs of refinancing a mortgage can pay off in the long run in the form of benefits like a lower interest rate or lower monthly payments. But before you dive into refinancing, make sure your calculations show you’d come out ahead financially. Consider consulting with a professional financial advisor for more information on the best strategies to reach your financial goals.