The Cost to Refinance Your Mortgage: Closing Costs and Interest Charges

Refinancing offers numerous benefits but comes with upfront costs. Let’s take a close look at typical closing fees and expenses and some strategies to minimize them.

From lowering your interest rate to changing your loan term, there are many financially friendly reasons to refinance your mortgage. But when it comes to refinancing, it takes money to save money– in other words, closing costs.

What Are Closing Costs?

Closing costs are the fees that cover the services provided by your lender and the other parties involved in the loan process. Total costs vary by state, loan type and lender, but they typically fall within the range of 3% to 6% of your home loan amount. For instance, if you're taking out a $200,000 mortgage, you might expect to pay between $6,000 and $12,000 in closing costs.

When considering refinancing, you’ll want to weigh the potential benefits against these upfront expenses to ensure you make the most informed and sensible decision.

What Is Mortgage Refinancing?

Refinancing your mortgage means taking out a new home loan to replace your existing loan. It’s your same home, with a new loan. There are two main types of refinancing:

Rate-and-term Refinance. A rate-and-term refinance is also known as a straight refinance. It replaces your current mortgage with a new one that better suits your financial needs. This could mean securing a lower interest rate, changing the loan term or type of loan, or all of the above.

Cash-out Refinance. A cash-out refinance replaces your existing mortgage with a new, higher-balance loan. You’ll receive the difference between your existing loan and new loan in cash, essentially “cashing out” your equity.

Streamline Refinances

In addition to the above, streamline refinancing programs offered by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) allow eligible homeowners with existing FHA or VA loans to refinance their mortgages with reduced documentation. However, borrowers cannot use these programs to switch to a different loan type.

Why Do Homeowners Refinance?

Here are some of the most common reasons you may want to consider refinancing:

Lower Your Monthly Payment

If interest rates have dropped since your original mortgage, refinancing to a lower interest rate could reduce your monthly principal payment.

Shorten Your Loan Term

Refinance to a shorter-term mortgage to pay off your mortgage faster. For example, many homeowners choose to refinance from a 30-year mortgage to a 15-year loan in order to expedite their mortgage payoff.

Change Your Mortgage Type

If you currently have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate can make budgeting easier, and help you avoid the uncertainty of potentially rising interest rates. On the other hand, if you plan to sell your home within the next few years, switching from a fixed-rate mortgage to an ARM could allow you to take advantage of lower initial interest rates during the introductory fixed period.

Remove Mortgage Insurance

If you’ve been paying mortgage insurance, a refinance may help you eliminate that extra expense if your property has increased in value or you’ve built up enough home equity. Homeowners with FHA loans may be able to remove mortgage insurance if they switch to a conventional loan and meet the qualification criteria.

Access Home Equity Funds

Using the equity in your home and doing a cash-out refinance can free up funds to pay for home renovations, school tuition, or other unforeseen expenses.

Consolidate Debt

A cash-out refinance can also be a good move to consolidate credit card debt, personal loans, medical or other high-interest debt. It will combine all your debts into a single, predictable monthly mortgage payment.

A Breakdown of Closing Costs

While refinancing has many benefits, it does come with a cost. Refinancing, like your initial mortgage, involves closing costs, such as the following:

Origination Fees

Origination fees are charged directly by the lender for their services throughout the mortgage process. These typically include:

• Application Fee
  The application fee covers the lender's cost to process your mortgage application. Even if your loan is denied, this fee is typically non-refundable. While some lenders might not charge an application fee, others might charge up to $500, which might be credited toward your closing costs if you pay early.
• Underwriting Fee
  The underwriting fee covers the work your lender does to review your application, verify your information, and ultimately approve your loan. The exact amount varies depending on your lender, but it can start at $495 for conventional conforming, FHA, VA and USDA loans.
• Credit Check
  To assess your risk as a borrower, a lender will access your credit report. This provides insights into your payment history, outstanding debts, and credit utilization. Most lenders charge a fee to cover this cost, typically ranging from $15 to $30. Some lenders might waive this fee if they receive a discount from the credit bureaus.

Third-Party Fees

These fees are charged to other parties involved during the mortgage refinance.

• Recording Fee
  The county recorder's office charges this fee to record a full or partial lien release/satisfaction of the mortgage. Fees vary widely by state, county, document type, and number of pages, but may be around $125.
• Survey Fee
  In certain states, a professional survey is required to confirm property lines prior to closing. This service typically costs between $300 and $500, although larger or more complex properties may incur higher fees.
• Home Appraisal Fee
  A home appraisal is a licensed real estate appraiser’s opinion of the value of the property securing the mortgage. Depending on the property's complexity, location, and type, it can cost anywhere from $350 to $1,200.
• Title Search and Insurance
  A title search is performed by a title company prior to closing with your escrow company. The title company will examine historical property records to ensure no one else has a claim on the property and that there are no issues that could affect your ownership.
  
  Since a title search may not uncover everything, a title insurance policy will be issued. This protects both the homeowner and the mortgage lender in case an issue arises down the road.
  
  Title insurance costs can vary based on the policy type, the home's location, and its value. However, they typically cost between 0.5% and 1% of the home purchase price. For example, if you’re buying a home valued at $500,000, you can anticipate the costs in the range of $2,000 to $3,000.

Attorney Fees

In some states, an attorney is required to finalize your home purchase. If this applies to you, you’ll need to factor in attorney fees, which cover the preparation and review of documents and contracts. Fees vary depending on each attorney’s individual rate and the complexity of the purchase.

Mortgage Points

While not required, you may be able to purchase mortgage points to lower the initial interest rate on a home loan. A mortgage point is a percentage-based fee paid at closing. Each point is equivalent to 1% of your total loan amount. For example, on a $200,000 mortgage, one point would cost you $2,000. Mortgage points are essentially prepaid interest. They are also known as “buying down the rate” on a mortgage and may help you reduce your monthly principal payment. If you choose to buy mortgage points, keep in mind that they need to be paid at closing and are paid directly to your lender. Essentially, mortgage points are beneficial if you want to pay more now and less later.

Other Fees

In addition to the above fees, which are fairly standard, there may be other closing fees depending on the type of mortgage and your home's location.

• FHA Mortgage Insurance Premium
  When refinancing a Federal Housing Administration (FHA) loan, you’ll need to factor in the upfront mortgage insurance premium (MIP) as part of your closing costs. This one-time fee is currently 1.75% of your base loan amount and is separate from your monthly mortgage insurance payments.
• VA Fee
  If you have a VA loan, there may be an additional one-time funding fee payable to the Department of Veterans Affairs (VA). This fee helps offset programs for veterans, such as the VA loan itself. The current fee for VA-backed cash-out refinancing loans is 2.15% of the loan amount for the first use and 3.3% for subsequent uses.
• Flood Fee
  If your property is located in a flood zone, your lender may require flood zone certification to assess the necessity of flood insurance, which is separate from homeowners insurance. The flood fee covers the cost of this inspection.

The Importance of the Break-Even Point

Keep in mind that even if you lower your monthly mortgage payment, refinancing can increase your overall finance charges over the life of your loan. This happens because refinancing typically restarts the amortization clock. You'll start a new mortgage with a fresh payment schedule, even if you refinance with the same lender. Plus, you have closing costs, which will increase your loan if you don’t pay those expenses upfront.

When evaluating whether refinancing is a good option for you, it’s important to consider the break-even point. This is the point at which the monthly savings from a refinance offset your refinancing costs. The break-even point will differ for every borrower and depends on how long you plan to stay in your home. However, it’s generally advised to break even within approximately two to three years.

To crunch the numbers, use our Am I Better Off Refinancing? calculator. Input the details of your current loan and the new one to calculate your potential monthly payment, interest savings, and break-even point.

How to Lower Your Refinancing Costs

Closing costs can be a significant addition to the refinancing process, but there are a few ways to potentially reduce out-of-pocket costs.

Compare Lenders

All lenders are different, and you should consider more than just interest rates. As you shop around for a lender, request a list of costs, such as origination fees and discount points. Knowing these expenses upfront will allow you to accurately compare loan options and choose the one that aligns best with your financial situation and long-term goals.

Roll Closing Costs Into Your Mortgage

Rolling closing costs into your mortgage eliminates the need for a large upfront payment. But remember, since you’re borrowing the money for your closing costs and adding that amount to your loan, you’ll be paying interest on those costs for the life of your loan.

Improve Your Credit

Check your credit report before applying for a refinance to ensure it’s accurate and your credit is in good standing. Take steps to resolve any errors or discrepancies as your credit history can impact what type of loan you may be eligible for.

Reduce Debt

Reducing your debt as much as possible may improve your credit score, which can help you appear as a less risky borrower to potential lenders.

Refi Your Way to Your Goals With Help From Pennymac

Closing costs are an inevitable part of the home loan process, whether you’re making your first purchase or refinancing. Refinancing has some real benefits, but before moving forward, be sure you understand the closing costs involved and how they could impact your finances and goals. Ready to learn more? Explore our refinancing options and then contact a Pennymac Loan Expert for additional guidance on next steps.

Refinancing FAQs

Will I Save Money If I Refinance?

Whether refinancing will save you money depends on several factors, such as the new loan interest rate and term, closing costs, and how long you plan to stay in your home. For example, lower rates can reduce monthly payments and overall interest, but extending the loan term might increase total interest costs. On the flip side, if you shorten your loan term, your monthly payment will likely increase but you’ll reduce the total amount of interest paid. Our refinancing calculator can help you break down the numbers.

Also, remember that while refinancing might reduce your principal and interest payments, costs like property taxes, homeowners insurance, HOA fees, and potential mortgage insurance will affect your overall monthly payment. You should account for all these expenses to fully understand the financial impact of refinancing.

What Documents Do I Need to Refinance?

Some of the documents commonly required for a refinance include proof of income, copies of your homeowners insurance, copies of your W-2 forms, bank statements, and other asset information, and a copy of your title insurance.

Can I Refinance If I Have Bad Credit?

There are loans available to those with sub-optimal credit. Contact a Pennymac Loan Expert to discuss your options.