Refinancing your home loan can be a smart financial move, especially if interest rates have dropped or you’re looking to lower your monthly payments. However, refinancing isn’t free—it comes with several costs that can impact your savings.
Understanding these expenses is crucial to deciding whether refinancing is worth it. In this guide, we’ll break down the typical costs of refinancing a home loan and what to expect throughout the process.
Application fees
The application fee is the first cost you’ll encounter when refinancing your home loan. Lenders charge this fee to cover the administrative work of processing your loan application.
Average Cost: Application fees can range from $200 to $500, depending on the lender.
Pro Tip: Some lenders may offer promotions where they waive application fees, so it’s worth shopping around for the best deal.
Loan origination fees
Loan origination fees are charged by lenders for the work involved in creating and processing your new loan. These fees typically cover document preparation, underwriting, and other services required to finalize your loan.
Average Cost: Origination fees usually range from 0.5% to 1% of the loan amount. For a $200,000 mortgage, this could be between $1,000 and $2,000.
Why It’s Important: Loan origination fees can add up quickly, so it’s essential to factor them into your total refinancing costs.
Appraisal fees
Lenders typically require a home appraisal during the refinancing process to determine the current value of your property. This ensures that the lender isn’t loaning more than the house is worth.
Average Cost: Appraisal fees generally range from $300 to $600, depending on your location and the size of your home.
Pro Tip: If your home was recently appraised, ask the lender if they can waive this requirement or accept a previous appraisal to save on costs.
Title search and insurance fees
A title search is necessary to confirm that there are no liens or legal claims against your property before refinancing. Lenders also require title insurance to protect themselves (and you) from any potential title issues that might arise.
Average Cost: Title search fees range from $200 to $400, while title insurance can cost between $500 and $1,000, depending on the loan size.
Why It’s Necessary: Title searches and insurance are essential to ensure the property’s legal status is clear, preventing future disputes over ownership.
Closing costs
Refinancing involves closing costs, just like when you first took out your mortgage. These costs include various expenses such as attorney fees, notary fees, and recording fees. You’ll need to pay these costs upfront or roll them into your loan, depending on your lender’s terms.
Average Cost: Closing costs typically range from 2% to 5% of the loan amount. On a $200,000 loan, this would be between $4,000 and $10,000.
Pro Tip: Some lenders offer “no-closing-cost” refinancing options, where the closing costs are rolled into the loan. However, this usually results in a slightly higher interest rate.
Private Mortgage Insurance (PMI)
If your home’s equity falls below 20% after refinancing, you may need to pay for private mortgage insurance (PMI). PMI protects the lender in case you default on the loan and is generally required if you don’t have sufficient equity in your home.
Average Cost: PMI typically ranges from 0.5% to 1% of the loan amount annually. For a $200,000 loan, this could add $1,000 to $2,000 per year in insurance costs.
How to Avoid It: If possible, wait until you have at least 20% equity in your home before refinancing to avoid the additional cost of PMI.
Prepayment penalties
Some lenders charge a prepayment penalty if you pay off your original mortgage early by refinancing. This fee is designed to compensate the lender for the interest they would have earned if you had kept the loan for its full term.
Average Cost: Prepayment penalties vary but can be anywhere from 1% to 3% of the original loan amount.
What to Do: Check the terms of your current mortgage to see if a prepayment penalty applies. If so, calculate whether the penalty offsets the savings you’d gain from refinancing.
Discount points (Optional)
Discount points are an optional cost that you can pay to lower your interest rate. One discount point typically equals 1% of the loan amount and reduces your interest rate by a small fraction. This upfront payment can save you money over the life of the loan if you plan to stay in the home long-term.
Average Cost: Each point costs about 1% of your loan amount. For a $200,000 loan, one point would cost $2,000.
Pro Tip: Use a mortgage calculator to determine whether paying for discount points is worth it based on how long you plan to stay in the home.
Refinancing a home loan can offer significant savings, especially if you secure a lower interest rate or switch to a more favorable loan term. However, it’s important to consider the costs involved, such as application fees, appraisal fees, and closing costs.
By understanding these expenses, you can make an informed decision about whether refinancing is the right move for your financial situation.