How Expensive is a Mortgage Refinance?

Refinancing is similar to applying for an original mortgage. But people who have never done it before may be unsure of their out-of-pocket costs. To help you plan for your refinance, an understanding of what fees to expect can come in handy.

If you're going to do a mortgage refinance, there are certain things to do before you begin. First, check to see if your current mortgage has a prepayment penalty clause. If so, you could be charged substantial fees for paying off your mortgage early. A refinance automatically pays off the old mortgage, and if prepayment penalties apply, they could cost you a big chunk of cash.

Beyond the potential for prepayment fees, the main costs to consider regarding your refinance are the new interest rate and monthly payment. Do a side-by-side comparison to find out how the new loan looks in relation to your existing one. If it will save you money, you'll then be ready to take the next logical step- reviewing your closing costs.

Costs of refinancing

Most lenders will require a new appraisal, but some may waive this requirement, especially if you're refinancing a loan that they already service. A typical appraisal will average around $200, but some modified "drive by" appraisals-where the appraiser just examines the outside of the home and doesn't do a thorough inside investigation-can cost considerably less. There will also be fees for loan origination, processing your application, and doing a credit check.

Your "lender fees" may also include paying points. A point is equal to one percent of the loan amount. Some lenders waive them, but other financial institutions charge a point to the borrower as a way to generate the commission paid to the loan officer. If you want to get an especially low interest rate, you can also pay extra points up front. For instance, you might be able to pay an extra point to get a rate that's one half of a percentage rate lower. If you plan to keep the loan for a long time, this might pay for itself over time by saving you interest. It's also important to note that interest rates are subject to constant change and fluctuation, so base your closing cost estimates on the actual rate you confirm and lock.

Third-party fees cover such incidentals as title insurance, document preparation, and recording of the transaction with the county courthouse. These will vary from lender to lender and from state to state. You will also have pre-paid items, such as taxes and insurance premiums.

A typical rule of thumb is that your total closing costs will typically average about 2 to 3 percent of your loan amount. A written estimate of these costs will be provided to you soon after you submit your refinancing application. Should you have any questions about the fees, consult your lender or real estate attorney.