Refinancing Your Mortgage? Here Are the Costs You Can Expect

Refinancing a mortgage comes with many benefits, but there are costs to factor in when determining if it will actually save you money in the long run. According to homeownership data and analytics company Black Knight, mortgage interest rates hit a historic low in 2020, leaving a record-setting 19 million homeowners eligible for refinancing. They also reported an estimated average after-refinancing savings of $300 per month.

Though interest rates have increased since 2020 (here's the current interest rate for a 30-year fixed mortgage), there are government-backed mortgage relief programs that benefit eligible homeowners. For example, according to Mortgage Reports, eligible homeowners can refinance their mortgage as early as three months after ending a forbearance plan (meaning an agreement between a lender and a borrower to delay foreclosure).

Interest rates tend to fluctuate, so if you're ready to refinance your mortgage, start your research today to get the best possible interest rate. "It may be the right time to refinance if you'd like to reduce your current mortgage rate, reduce your monthly payment, cash out on rising equity, shorten your term to pay off your home loan early, or even consolidate large amounts of debt," says Andrina Valdes, COO of Cornerstone Home Lending, Inc.

Refinancing your mortgage can potentially save you hundreds per month, but knowing the total costs involved—and how they might impact your finances for the life of the mortgage—can help you decide if it's the right move for you. Here are the costs to expect when refinancing your mortgage, according to real estate experts.

Closing Costs

The average cost to refinance your mortgage is generally 2 to 5 percent of the amount left on your loan. It also depends on where you live. "If you live in a relatively rural location with low property values, you're going to pay less than someone living among million-dollar homes," says Cliff Auerswald, president of All Reverse Mortgage.

While the amount varies based on location and loan amount, Freddie Mac reports the average closing cost of refinancing your mortgage is about $5000. "For example, you can expect your closing costs to be from around $2000 to $6000 for a $100,000 mortgage refinance," says Leonard Ang, CEO of iPropertyManagement, an online guide for real estate investors, landlords, and tenants. To calculate your estimated refinancing costs, try this mortgage refinance calculator provided by Freddie Mac.

Additional Fees

Fees for things like the application, credit reports, home appraisal, and title searches can add to your closing costs. These fees range from a few hundred dollars to a few thousand depending on the lender, where you live, and your home inspection results.

"Application fees cover the cost of the refinance process, including checking your credit report," explains Auerswald. He says they generally range from $50 to $300, and you have to pay them whether you are approved or denied.

You could also be charged prepayment penalties, which are one to six months of interest payments. Auerswald says they may run higher based on your payment history but, if you have made your mortgage payments on time each month, you might be able to lower that amount. "Prepayment penalties are a lender's way of discouraging you from ending your current loan early," he adds.

Title search and insurance can be the most expensive fees, costing between $600 and $1000, says Auerswald. Title service fees are for getting a title insurance policy for your lender—protecting them in case there's a problem with the home's title, such as a legal claim—and it can be a long process. "You can save your lender some time by digging up your past title search," suggests Auerswald. "Although there may be some changes, it'll make the process go much faster."

Many additional fees at closing depend on your lender, so do your research and compare lenders to see who offers the best deal. "Some closing costs are static, but fees for application, underwriting, and processing may vary by lender," says Valdes. "Shopping around could help you find lower upfront fees, and you could use this information to negotiate with your current mortgage lender."

No-Closing-Costs Option

Refinancing your mortgage without closing costs is an option called (not surprisingly) a no-closing-cost refinance. While sometimes a viable option, carefully look at your numbers to see if it saves you money. In the end, you might just end up paying the same amount or more.

As Valdes explains, "Instead of paying for closing costs at the closing table, your closing costs will be lumped into your new loan or be compensated for in agreeing to a higher mortgage rate." She suggests negotiating with your lender regarding their fees instead of opting for a no-closing-costs deal.

It might also be challenging to find a lender that provides a no-closing-cost option. "It takes good market research to find a lender that offers such services," says Jeff Johnson, real estate agent and acquisition manager of Simple Homebuyers. Even if you find the right lender, not paying closing costs while refinancing is unlikely to save you money down the line, because you end up paying more interest. "You save almost no money even after refinancing without closing costs," he continues.

Calculating your total refinance amount, comparing lenders, and thinking about how long you plan on living in your home are factors to consider to ensure your decision to refinance (or not) makes sense for your short-term and long-term financial goals.