What are Typical Closing Costs on a Refinance?
Point of Interest
Refinance rates are at historic lows, making this an excellent time to refinance your mortgage. Use the tips below to keep closing costs low and refinance to a better mortgage loan.
One of the primary ways to lower your mortgage loan costs is through refinancing to a loan with a lower interest rate. Luckily, you can get a refinancing loan with a low rate pretty easily right now thanks to the coronavirus pandemic.
After the economy took a hit from the COVID-19 pandemic in early 2020, the interest rates on mortgages have continued to decline, with the 30-year fixed-rate loan rate dipping below 3% for the first time since 1971.
No time in recent history has been as good as right now for refinancing your mortgage loan, but it’s important to keep in mind that while refinancing a mortgage loan can save you a ton of money in interest, it also comes with new closing costs.
These closing costs can cost you more than you’ll save with a new interest rate on a loan refinance, so before you sign on the dotted line for a refi, it’s important to ask yourself questions like, “How much should I pay in closing costs for a refinance?”
What are mortgage closing costs?
You’re already familiar with closing costs since you had to qualify for a mortgage when you first bought your house, and a refinance is nothing more than a new mortgage agreement. To refresh your memory, closing costs are the expenses paid to create the mortgage agreement. When you refinance your loan, you’ll pay many of the same expenses that you paid when you took out your original home mortgage.
Calculating refinance closing costs is complex and there’s no real standard method. Your location and the lender you choose are two factors that will have a large impact on your closing costs. Other factors that influence how much you pay in closing costs for a refi include the mortgage type, the term of the loan, the amount of home equity you have and your credit score. The property tax rate where you live can also have an influence on the closing costs of your refinance.
According to the U.S. Federal Reserve Bank, mortgage refinancing fees will typically run from 3% to 6% of the loan amount. ClosingCorp, a technology firm that collects and analyzes real estate data, stated in its Average Mortgage Closing Costs Report for 2019 that the average closing costs in the U.S. in 2019 were $5,749 including taxes and $3,339 without taxes.
One of the best ways to find out how much you’ll pay in refinance closing costs prior to closing is to use a reliable refinancing calculator. This will give you a good idea of how much the refinancing will cost, what your break-even point is and how long it will take before you recover the closing costs.
How much should I expect for closing costs?
The list of closing cost expenses is a long one, and it makes sense for you to become familiar with what charges you might see when refinancing. After all, forewarned is forearmed, as they say.
With that in mind, here are some common refinancing costs and what you can expect to pay.
- Application fee — This is the cost for checking your credit score and processing the loan request, and on average, runs between $75 to $300.
- Loan origination fee — This is the lender’s fee for preparing and evaluating your loan request. On average, it will cost you between 0% and 1.5% of the loan principal.
- Points — Points can be charged as a fee for the lender and can also be paid to reduce the interest rate of the loan. Each point will run, on average, between 0% and 3% of loan principal.
- Appraisal fee — The lender will want an appraisal of your home to verify its worth is at least as much as the loan amount. Appraisals run, on average, from $300 to $700.
- Inspection fee — Some lenders will require certain inspections, such as termite or pest inspections, septic system tests, water tests or structural condition tests. These types of appraisals run, on average, from $175 to $350 — though it can vary significantly depending on the type of test.
- Attorney fees — These are charges for the services of the lawyer or company conducting the closing for the lender, and they run, on average, from $500 to $1,000.
- Title search & insurance — This is the cost of a records search (and insurance from search errors) to verify you are the lawful owner of the property and to check for existing liens. Expect to pay from $700 to $900 for it.
- Survey fee — A survey must be conducted to confirm the property boundaries and location of buildings on the land, and it will run you, on average, from $150 to $400.
- Mortgage insurance — This is only required for government backed mortgages, or for private mortgages for more than 80% of the home’s value. If required, this will run you between 0.5% and 2% of loan principal.
- Property tax — Depending where you live you may need to pay property taxes up front. In general, this will cost you about six months worth of property tax.
How to reduce your mortgage refinancing costs
The total closing costs for refi will tell you if it is financially savvy to replace your current mortgage with a new mortgage. When you consider the thousands of dollars in closing costs you’ll be paying, it makes sense to look for ways to save on the total closing costs.
Luckily, there are several things you can do to minimize your closing costs when refinancing, including:
- Clean up your credit — As soon as possible, start to strengthen your credit, savings and income. Shoot for a credit score of 740 to get the best rates. Increase your savings to show you have a buffer for emergencies. Drop your debt-to-income ratio to 35% or less to reduce your risk as a borrower.
- Compare offers from different lenders — Don’t simply go with your existing lender for your refi because it’s convenient. Get quotes from several lenders instead to be sure you’re getting the best deal.
- Check the loan estimate — Review the loan estimate and ask for clarification on items you aren’t completely clear on. Be sure to look over the list of services you can comparison shop for, and then shop around for as many services as possible.
- Look into appraisal waivers — See if you can qualify for an appraisal waiver, which will save several hundred dollars.
- Get a title company discount — Use the same title insurance company you’ve already used in the past and ask for the discounted reissue rate.
- Don’t pay for mortgage points — Avoid paying mortgage points to lower your refinance rate. Rates are already amazingly low right now, so don’t spend a few thousand dollars on points that won’t shave much off your interest rate.
- Negotiate your fees — Many of the fees associated with refinancing can be negotiated or waived. These include the appraisal fee, any points being charged, many of the inspection fees and the survey fee, but you’ll need to negotiate with the right people to get rid of them.
The final word
While it’s true that refinance closing costs are significant, these fees don’t have to be onerous. There are ways to decrease the closing costs on refi loans, and when you do, the loan becomes far more affordable. With refinance rates at their lowest levels in nearly five decades, there’s no reason not to at least explore refinancing your mortgage. After all, it could save you tens of thousands of dollars over the life of your loan.