With mortgage interest rates at historic lows, homeowners are refinancing their mortgages. While refinancing should result in lower expenses for the homeowner, the process also comes with one-time fees, called closing costs. These fees are paid out of pocket at closing or rolled into the new loan and paid monthly. Knowing the costs of refinancing will help you decide if this is a smart financial move.

Common Mortgage Refinance Fees

A variety of fees come with refinancing a mortgage. Some are mandatory, like those to record the note with your state or county. Others are paid to the lender as the cost of processing the refinanced loan. Other common closing costs and fees may not apply to your situation.

Here are some common refinancing costs and fees:

  • Points
  • Application fees
  • Loan fees, which may include the following: origination fees, credit report fees, tax service fees, underwriting fees, document preparation fees, wire transfer fee, office administration fees
  • Inspection fee
  • Appraisal fee
  • Title fees
  • Mortgage recording fees

Your lender will provide an estimate of the closing costs and fees when you apply to refinance and a full statement before closing. The total amount of closing costs varies widely by lender and region and generally ranges from $1,500 to $5,000. If you don’t understand some of the fees or feel that they don’t apply to you, bring it up with your lender.

Key Takeaways

  • A handful of one-time fees, known as closing costs, are charged as part of a refinancing.
  • Understanding and comparing the closing costs with the amount that you’ll save each month can help you decide if refinancing is right for you.
  • No-cost refinances don’t exist. Still, steps can be taken to lower your refinance costs.

When Should You Refinance?

With interest rates at historic lows, many homeowners are refinancing. Even if you bought or refinanced only a few years ago, doing it again may make sense. Knowing how much you’ll pay out of pocket will help you decide what to do.

A simple way to get an idea of whether refinancing is good for you is to take your total out-of-pocket closing costs and divide the figure by the amount that you would save each month. That will be approximately how long it would take to pay back your closing costs. Then, take your current monthly mortgage payment and subtract your estimated payment after refinancing. This is how much extra you would have in your budget each month.

For example, consider a case where your total closing costs are around $4,500 and your new mortgage payment is $150 lower each month. This means that it would take around 30 months to break even on the closing costs that you had to pay with the amount you are saving each month. The lower the number of months, the more it makes sense to refinance. This calculation isn’t exact, but it can be one factor that you use to help you decide if you should refinance your mortgage.

There are also a few bad reasons to refinance a mortgage. These include trying to lengthen the term of your loan, consolidating debt, or taking equity out of your house to invest. If you’re refinancing for one of those reasons, then make sure to double-check your thinking with a financial advisor to make sure that you’re making a smart financial move.

How to Lower the Cost of Refinancing

While some lenders may advertise a no-cost refinance, no such thing exists. Lenders, brokers, appraisers, and other professionals all need to get paid for their work, and that money comes from the fees that you pay. You can often include the closing costs in the balance of your new loan, but that will raise the total amount, meaning your monthly payment will be higher. It still may be a good idea, but you’ll want to be aware of how much in closing costs you’re rolling into your new loan.

The best way to lower the cost of refinancing is to shop around with different lenders. When you compare lenders, investigate the interest rates and closing costs. You should get an estimate of the fees and and interest rate when you apply for a loan. 

You should get the final closing statement a day or two before you close. Take the time to review the closing statement before you sign the paperwork and ask about any fees that you don’t understand.

The Bottom Line

With interest rates at historically low levels, many people are considering refinancing their mortgages. There are a variety of different fees associated with refinancing, and these are typically referred to as closing costs. These closing costs will generally total several thousands of dollars and can either be paid out of pocket at closing or rolled into the balance of your new loan. Being aware of what each of these fees is can help you keep your closing costs low.