Refinancing can be a sensible decision when it saves you money or provides you with the cash you need to cover a major essential expense. However, the opportunity to refinance at a lower interest rate doesn’t justify a refinance by itself, as the savings in interest payments may be less than the total cost of the refinance. The closing costs of a mortgage include many specific items that can result in a total running to thousands of dollars.
The size of the loan is the primary factor in determining your closing cost, although your location also can have a bearing on the total cost. The total closing cost will typically be between 2 and 5 percent of the loan principal, which, for a $200,000 mortgage, would be between $4,000 and $10,000. The average cost of a mortgage refinance is about $5,000.
The interest rate on a refinance is largely based on current economic conditions. You may want to consider a refinance when mortgage interest rates drop substantially below your initial mortgage rate. The average interest rate offered on a 30-year mortgage in the United States was about 2.5 percent in November 2020, assuming an applicant has perfect credit. The great majority of lenders were within 0.1 percentage points of this average after taking differences in closing costs into account.
The interest rate on a refinance can be significantly higher if your credit is less than perfect. Check your credit report for accuracy at AnnualCreditReport.com before you begin the application process for a refinance. Resolve any inaccuracies with the major credit agencies, Equifax, Experian, and TransUnion. If, after resolving inaccuracies, your credit score still isn’t high enough to qualify for a refinance, you’ll need to work on raising your score before trying again. Common strategies for improving your score include paying bills on time, keeping credit balances low, and making more than the minimum payments.
The origination fee is the charge for processing the refinance and is the single largest closing cost, typically 0.5 percent to 1 percent of the principal. Additional closing costs include the following:
- Title insurance $700-$900
- Attorney/closing fee $500-$1,000
- Appraisal fee $300-$400 (often more)
- Survey fee $150-$400
- Application fee $75-$300 (often more)
- Credit check fee $25 (often more)
- Recording fee (highly dependent on location)
It’s vital to consider both interest rate and closing costs when selecting a lender for a refinance, as lenders that offer attractive interest rates may charge high closing costs. You should shop around to get at least three quotes, including one from your current lender. Question the lenders about fees that seem unusually high to see if they’re negotiable, especially the underwriting and application fee. It may be possible to get the appraisal fee waived entirely if you’ve already had one done recently. In addition, you should ask your title insurer if it can reissue the same policy on the refinance, as this option often costs less than issuing an entirely new policy.
If you’re looking to refinance your mortgage it’s important to know the costs associated with this option. Talk to a financial advisor to figure out what costs you might face and to ensure you can afford to refinance your mortgage.