Middle aged couple making a budget for refinancing.

How Much Does It Cost To Refinance A Mortgage?

Victoria Araj8-minute read

March 03, 2022

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Think you’d benefit from a refinance? You might! A refinance can allow you to change the terms of your mortgage loan to make it easier to pay your bills or get cash out of your equity.

But like a home purchase, one of the requirements for refinancing is the payment of closing costs. In the case of a refi, you can expect to pay 2 – 3% of the remaining principal on your mortgage in closing costs.

In this article, we’ll look at a breakdown of refinancing costs and the benefits of doing so, to help you decide if a refinance is right for you.

How Much Does It Cost To Refinance Your Mortgage?

Your Closing Disclosure tells you exactly what you need to pay at closing. Here are a few of the refinancing closing costs you might see:

  • Application fee: Some lenders charge an application fee due when you apply for your refinance. You must pay your application fee even if the lender rejects your refinance request.
  • Appraisal fee: Most lenders require appraisals before refinancing. Most appraisers charge $300 – $500 for their services.
  • Attorney fees: In some states, an attorney must review and file paperwork for your loan. Attorney fees can vary widely by state.
  • Title search and insurance: Your lender may require another title search when you refinance your loan.

Expect to pay 2 – 3% of your loan balance in closing costs. You may be able to roll your closing costs into your loan balance, depending on your lender’s requirements. You also may be able to get a no-closing cost refinance, which doesn’t require you to pay any closing costs upfront. You still pay them eventually. They’re moved into your principal balance or exchanged for a higher mortgage rate.

Why Do Homeowners Refinance?

There are four major reasons why you might want to refinance your home loan. You may want to lower your interest rate, change your loan’s term, consolidate debt or take cash out of your equity. Let’s take a look at each of these motives in more detail.

Lower Your Rate

You may be able to save thousands of dollars in interest, particularly if you can refinance to a lower interest rate. This is especially true if you keep the same term on your loan. For example, if you refinance a 15-year loan into another 15-year loan, a lower interest rate will decrease your monthly mortgage payment.

Always remember to compare annual percentage rates (APRs) when you consider a refinance. Your APR includes both your base interest rate and any additional fees you must pay. The bigger the difference between your base rate and your APR, the more you’ll pay in closing costs when you finalize your refinance. Just be sure that you’re comparing apples to apples regarding the type of loan you’re considering when looking at APR.

Change Your Term

You may also want to refinance your loan term. For example, a 30-year mortgage term means that you must make monthly payments for 30 years until your loan matures. A refinance can allow you to make your loan’s term longer or shorter, depending on your needs.

  • Refinance to a longer term: You might want to refinance to a longer term if you’re having trouble keeping up with your payments. Going from a shorter term to a longer term gives you more time to pay back your loan and lowers your monthly payment. A longer term also means you’ll pay more in interest over time.
  • Refinance to a shorter term: You can also refinance to a shorter loan term to pay your loan off faster. When you take a shorter term, your monthly payment increases – but you save money on interest by paying off your loan faster. This can be a good option if you earn significantly more money now than you did when you first got your loan. Do the math and make sure you’ll be able to make your payments before you opt for a shorter loan term.

Consolidate Debt

A mortgage loan is one of the most affordable ways to borrow money. According to WalletHub, the average credit card has an interest rate that is more than 14% higher than the average 15-year mortgage rate. This means that if you have a significant amount of high-interest debt, you can save money when you consolidate what you owe with a cash-out refinance.

A cash-out refinance allows you to take money out of the equity you’ve built in your home. Every time you make a payment on your mortgage loan, or your home rises in value, you build equity. Equity is the percentage of your home that you own. When you pay off your loan, you have 100% equity in your property.

You take on a loan that’s worth more than what you currently owe with a cash-out refinance. In exchange, your lender gives you cash. Many homeowners who take cash-out refinances use that cash to pay off their debts. A cash-out refinance may or may not change your loan’s term, interest rate or payment – but it can have tax implications.

Here’s a quick example. Let’s say you have a home worth $150,000 and you’ve paid off $50,000. You then will have $50,000 worth of equity in your property. Let’s also say that you have $15,000 worth of credit card debt you need to pay off.

You would accept a loan worth $115,000 from your lender. In exchange, your lender pays off your existing $100,000 loan and gives you $15,000 in cash. You use that $15,000 to clear your credit card debts and continue making monthly mortgage payments to your new lender.

Take Cash Out For Other Purposes

You don’t need to use the money from your cash-out refinance just to pay off debt. Unlike other types of loans, you can use this money for almost anything. You can boost your savings or cover the cost of a home repair, and the tax implications of a cash-out refinance may also allow you to make the interest from the funds tax deductible (if you use the money for capital home improvements). Overall, a cash-out refinance is a great way to access low-interest funds for any reason.

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How Does Refinancing Work?

The first step is to see if you qualify for a refinance. You must already have a significant amount of equity in your home if you want to take a cash-out refinance. If you aren’t sure if you have enough equity to qualify for a cash-out, your lender will help you figure this out.

You also need to consider closing costs. Just like when you bought your home, you pay closing costs to your lender when you sign on your new mortgage. You can expect your closing costs to equal about 2 – 3% of the total value of your loan. As a general rule, you need to live in your home for at least a year after refinancing to gain a financial advantage through a refinance.

Next, find a lender. You don’t need to refinance with the same company that services your current loan. Compare lenders’ current interest rates and fees and ask about availability and how long the process usually takes.

Once you choose a lender, you’ll submit an application. Applying for a mortgage refinance is very similar to applying for your first mortgage. Your loan officer will ask you for a few documents, including your two most recent pay stubs, W-2s and bank statements. You may need to provide additional documentation if you’re self-employed.

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You may have the option to lock in your interest rate once you’ve completed your application. Locking your interest rate protects you against rising rates while you finish closing on your loan.

Your lender will schedule underwriting and an appraisal after you submit your documents. During underwriting, your lender looks at all of the documents you submitted and makes sure you meet minimum loan standards.

An appraiser will visit your property and give you a professional opinion of how much it’s worth. Lenders require appraisals because they need to know that the house is worth the money it is being mortgaged for. You may need to adjust the terms of your refinance if your appraisal comes back low.

Your lender will give you a Closing Disclosure once you’re done with underwriting and appraisals. The Closing Disclosure tells you the new terms of your loan and what you must pay in closing costs. You’ll need to acknowledge that you’ve read the disclosure, and your lender will schedule your closing.

At closing, you’ll sign off on your new loan. Bring a valid form of photo identification, a cashier’s check for your closing costs (if you’re not rolling them into your loan amount) and your Closing Disclosure. Sign off on your new loan and begin making payments toward your new mortgage on schedule.

Keep in mind that if you get a cash-out refinance, you won’t receive funds at closing. Your lender must give you 3 business days after closing to cancel your transaction. Your loan isn’t technically closed until this window passes. Most borrowers receive their funds within 3 – 5 days after closing.

Should You Refinance Your Mortgage?

There’s a lot to consider when deciding whether you should refinance. If any of the following apply to you, you may want to consider the possibility. You can also use a refinance calculator to help you get a sense for loan options, plus how a refi might change your monthly payment.

You’re Having Trouble Making Your Payments

Your monthly payments go down when you refinance to a longer term. A refinance can potentially save you from trouble making your mortgage payments.

You Can Get A Lower Rate

You’ll save money by paying less in interest if interest rates are lower now than when you first got your loan. You may also be able to get a lower interest rate if your credit score is higher now than when you got your loan.

You Want To Get Rid Of PMI

Private mortgage insurance (PMI) protects that the owners of a mortgage against default. Most mortgages require PMI if you have less than 20% down on your loan at closing. You may refinance and cancel your PMI if you now own more than 20% equity in your home.

It’s a little different with FHA loans, which are backed by the Federal Housing Administration. You must pay for mortgage insurance throughout the life of your FHA loan if you had a down payment of less than 10%. Many people who buy a home with an FHA loan refinance to a conventional loan after they reach 20% equity and remove their monthly insurance requirement.

You Have A Large Expense To Cover

A cash-out refinance can give you access to a low-interest loan. A cash-out refinance offers an option if you have a major expense coming up or if you need to pad your savings.

The Bottom Line

A refinance means that you pay off your original mortgage and take on a new loan. You can refinance to change your interest rate or mortgage term, consolidate debt or take cash out of your equity.

Applying for a refinance is similar to the home purchase process. You submit an application to your lender, undergo an appraisal and underwriting and attend a closing meeting.

You pay closing costs when you close on a refinance – just like when you signed on your original loan. You might see appraisal fees, attorney fees and title insurance fees all rolled up into closing costs.

Generally, you’ll pay 2 – 3% of your refinance’s value in closing costs. A refinance can be a good option if you’re having trouble making your payments, if you need cash or if you want to remove PMI.

If you're ready to begin the process, apply online now with Rocket Mortgage®.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.