Refinancing your mortgage loan to take advantage of lower interest rates can potentially save you money. However, some homeowners can't afford to refinance due to the cost of refinancing. Realizing the savings from refinancing often means staying in a home long enough to recoup the money spent on closing costs. The good news is that you don’t need to pay full price when it comes to refinancing closing costs.
Key Takeaways
- Borrowers should shop around if they want to lower their refinance closing costs.
- Refinances without closing costs are possible but can come with a higher mortgage rate, which can cost more in the long term.
- Borrowers can also negotiate a reduction in closing costs, including the lender, application, and processing fees.
Typical Refinance Closing Costs
Closing costs are fees borrowers incur when completing a real estate transaction. These are charges paid above the total purchase price of the property. You pay closing costs when the loan closes, and the property’s title gets transferred from the buyer to the seller. You also pay closing costs when refinancing a mortgage.
Closing costs can range between 3% and 6% of the home's total purchase price and may be paid by either the buyer or the seller—or both.
Closing costs may include the following:
- Origination fees
- Appraisal fees
- Title insurance
- Title search fees
- Survey costs
- Credit report and application fees
- Property taxes
- Prepaid homeowners insurance, including flood insurance, if needed
Lenders must provide you with a loan estimate form that includes closing costs and a list of expected fees.
Compare Mortgage Lenders
As you would shop around for a large purchase, such as a car or TV, the same approach should apply when seeking a mortgage refinance. Mortgage lenders offer different interest rates, terms, and borrowing costs. However, borrowers should also shop around for the lowest closing costs.
Start with your existing mortgage lender since they may want to keep you as a loyal customer and provide you with a refinancing offer. Be sure to shop around to see what the competition has to offer, including credit unions, local banks, and online lenders. Try to aim for three quotes comparing the fees and expenses.
As noted above, lenders are required to provide a loan estimate form that includes the closing costs. With this figure in hand, you can make an accurate comparison of what other lenders are going to charge you to close.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
Ask for a No-Closing-Cost Refinance
Homeowners who don’t have the money saved for closing costs can ask their mortgage lender to waive the closing costs—called a “no-closing-cost refinance.” While you won’t need to pay the closing costs upfront, it may cost you more in the long run. To waive the closing costs, the lender may charge a higher interest rate, which may cost you more over the entire length of the loan.
This strategy may work in your favor if you plan on refinancing again or don’t plan to stay in your home for more than five years. After all, it can take that long to recoup the closing costs. The extra interest often will be less than the closing costs if you refinance again sooner rather than later.
Loyalty Has Its Benefits
A move in interest rates can lead to competition for mortgage loans. As a result, your current lender may want to keep your business and may go to great lengths to continue being your mortgage loan provider. However, the lender won't offer you discounts if you don’t ask for them.
To potentially reduce some of the closing costs of a refinance, ask for closing costs to be waived. The bank or mortgage lender may be willing to waive some of the fees or even pay them for you.
How to Negotiate a Reduction in Lender Fees
Not all fees are created equal. One lender will charge different rates than another down the block. While some closing costs are not negotiable, you can save money.
For example, you can ask the lender to waive the application and processing fees. The application fee covers the administrative costs of applying for the refinancing, while the processing fee is the cost of underwriting the loan.
Lenders may not be willing to lower their origination fees, but knowing how much you’ll pay on average can also help when shopping around. The origination fee is typically between 0.5% and 1% of the loan amount. For example, the origination fee for a $300,000 refinance would cost $3,000 at most. If a lender charges more than 1%, shopping around is definitely worth it.
Lenders can charge you a maximum loan origination fee of 2% of the loan amount.
You can even lower the amount you pay for title insurance by shopping around. Sure, your lender will have a preferred insurer it wants you to use, but that’s only a suggestion. The one area where you won’t be able to negotiate a lower price is the appraisal because the lender orders that one for you.
How Much Are the Closing Costs for Refinancing a Mortgage Loan?
Typically, the closing costs range from 3% to 6% of the borrowed amount. For example, a $300,000 loan refinancing might cost $9,000 to $18,000.
What Are the Closing Costs of Refinancing a Mortgage?
The fees you must pay upfront when you sign the loan documents are called closing costs, which include fees for the appraisal, application process, title insurance, title search, and credit pull. You may also be required to prepay a portion of your property taxes and homeowners insurance costs.
Is There a Way to Avoid Closing Costs When Refinancing?
You can opt for a no-closing cost mortgage loan in which you will not pay any costs upfront at the loan's closing. However, the closing is not free. The mortgage lender can embed the costs in the loan amount or the loan's interest rate, which can make the costs even more expensive over time.
The Bottom Line
Refinancing into a lower-interest mortgage may save you money, but you must pay closing costs—similar to when taking out your first mortgage. The closing costs can vary from one lender to the next. Shopping around for the best refinancing offer and asking your existing mortgage servicer for discounts can help you lower the cost of refinancing.
